ECONOMICS   OF   BUSINESS 


THE  MACMILLAN  COMPANY 

NEW  YORK   •    BOSTON   •    CHICAGO  •    DALLAS     . 
ATLANTA  •    SAN   FRANCISCO 

MACMILLAN  &  CO.,  Limited 

LONDON  •    BOMBAY  •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd. 

TORONTO 


ECONOMICS  OF  BUSINESS 


BY 
NORRIS  A.  BRISCO,  Ph.D.,  F.R.H.S. 

FELLOW   OF  THE   ROYAL   ECONOMIC   SOCIETY,  SOMETIME   FELLOW   IN    ECONOMICS 

COLUMBIA      UNIVERSITY,     AUTHOR     OF      "  THE      ECONOMIC      POLICY      OF 

ROBERT     WALPOLE,"     DEPARTMENTAL     EDITOR      FOR      CANADA 

"  BOOK    OF  KNOWLEDGE,"   DEPARTMENT   OF  POLITICAL 

SCIENCE,  COLLEGE  OF  THE  CITY  OF  NEW  YORK 


THE   MACMILLAN    COMPANY 
1913 

All  rights  reserved 


Copyright,  i913» 
By  the  MACMILLAN  COMPANY. 

Set  up  and  ekctrotyped.    Published  June,  1913. 


'6^ 


NorfaootJ  ^re«» 

J.  S.  Gushing  Co.  —  Berwick  «fc  Smith  Co. 

Norwood,  Mass.,  U.S.A. 


MY  WIFE 


267361 


Digitized  by  tine  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/economicsofbusinOObrisrich 


PREFACE 

During  the  past  twenty-five  years,  American  indus- 
trial and  business  life  has  undergone  many  changes. 
Increased  competition  cut  profits  to  a  narrow  margin, 
and  in  order  to  lower  costs,  the  entrepreneur  has  been 
driven  to  a  study  of  factory  conditions.  The  factory, 
therefore,  is  to-day  the  center  of  investigation  and  study. 
The  wastes  of  time,  energy  and  materials  revealed  by 
this  study  amazed  even  the  most  successful  entrepre- 
neurs. Efficiency,  the  modern  watchword,  demands 
organization,  system,  cost  accounting,  cooperation  and 
coordination  and  touches  business  activities  outside  the 
factory,  as  advertising,  buying  and  selling.  No  branch 
of  industry  has  escaped  investigation,  and  the  result  is  a 
great  awakening  to  the  lack  of  method  and  system. 

This  study  of  the  various  kinds  of  business  activities 
has  produced  a  literature  treating  different  phases  of 
business.  Of  all  such  contributions,  the  most  signifi- 
cant are  those  made  by  successful  business  men  who 
recounted  their  own  experiences,  pointed  out  the  broad 
principles  to  be  derived  therefrom  and  explained  the 
methods  by  which  these  principles  may  be  specifically 
applied.  From  an  analysis  of  such  data,  and  from  a 
study  of  the  methods  of  many  successful  business  en- 
terprises have  been  deduced  the  fundamental  principles 
underlying  business.  To  express  these  principles  in 
clear  and  simple  language  is  the  purpose  of  this  book. 


viii  PREFACE 

The  author  has  endeavored  to  produce  a  book  which 
will  assist  business  men  in  their  efforts  to  obtain  greater 
efficiency,  and  in  which  business  principles  are  pre- 
sented in  such  clear,  non-technical  language,  that  they 
may  be  successfully  taught  in  the  class  room. 

NORRIS   A.   BRISCO. 

New  York,  May,  1913. 


CONTENTS 

CHAPTER   I 
ECONOMIC   BASIS   OF  BUSINESS 

FAGK 

Business  in  Early  Times  —  The  Early  Merchant  Trader  —  Sys- 
tems of  Production  —  Family  —  Handicraft  —  Domestic  — 
Factory  —  Effects  of  Factory  System  —  Division  of  Labor  — 
Effects  —  Business  in  Its  Limited  Meaning — Business  Units 

—  Branches  of  Production — Extractive  Industries  —  Manu- 
facture —  Commerce  —  Transportation  —  Market  —  Its  Early 
Meaning  —  Its  Modern  Meaning —  Kinds  of  Markets —  Fac- 
tors of  Production —  Land  —  Labor —  Capital  —  Kinds  of 
Capital  —  Managerial  Ability  —  Methods  of  Conducting  a 
Business  —  Public  Ownership  —  Cooperation  —  Entrepre- 
neurship 1 

CHAPTER   II 
TYPES   OF   BUSINESS   ORGANIZATIONS 

Types  of  Business  Organizations — Single   Entrepreneurship  — 
Partnership  —  Unlimited  Liability  —  Special  Partners  —  Dis-  i 
solution  —  Joint  Stock  Company  —  Characteristics  —  Advan- 
tages of  Partnership  —  Articles  of  Copartnership  —  Essentials    ; 

—  Corporation  —  Public  —  Private  —  Classes  of  Private  — 
Non-stock  —  Stock  —  Characteristics  —  Classes  of  Stock  — 
Industrial — Commercial —  Public  Service — Financial — Cor- 
porations Formed  by  Special  Statute  —  General  Laws  —  Ad- 
vantages of  a  Corporation  —  Disadvantages  —  Charter — 
Essentials  —  Incorporators  —  Qualifications  —  Foreign  Cor- 
poration —  Its  Regulations  —  By-laws  —  Capital  Stock  — 
Stockholder — Methods  of  Issuing  Stock       ....      25 

CHAPTER   HI 
INTERIOR   ORGANIZATION 

Dividends  —  Rights  of  Stockholders  to  Profits  —  Powers  of  Stock- 
holders —  Directors  —  Agents  of  the  Corporation  —  Liability 


CONTENTS 

PAGE 

—  Duties  —  Dummy  Directors  —  Cumulative  Voting  —  Offi- 
cers of  a  Corporation  —  Chairman  of  Board  of  Directors  — 
President  —  Vice  President  —  Secretary  —  Treasurer  —  Gen- 
eral Manager  —  Auditor  —  Counsel  —  Bonds  —  Varieties  — 
Mortgage  —  Income  —  Convertible  —  Collateral  —  Trust  — 
Debenture  —  Rights  of  Bondholders  —  Capitalization  —  Wa- 
tered Stock— Promoter — Underwriter — Holding  Company 

—  Insolvency  —  Bankruptcy —  Receivership  —  Receiver  — 
Duties —  Reorganization .52 


CHAPTER   IV 

PRINCIPLES   OF   MANAGEMENT 

Business  Organization —  Object —  Selection  of  Men  and  Superin- 
tendents— ^Discipline — Responsibility  Clearly  Defined  — 
System  —  Proper  Method  of  Installation —  Red  Tape —  Re- 
sults of  Lack  of  System  —  Advantages  of  System  —  Coopera- 
tion—  Means  of  Obtaining  —  Coordination  —  Effects  of  Poor 
Coordination — Essentials  for  Proper  Coordination  —  Effi- 
ciency—  Standard  for  Efficiency  —  Efficiency  not  Modern  — 
Determination  of  Efficiency — An  Efficient  Factory — Per- 
sonaHty  in  Business  —  Proper  Relationship  between  Em- 
ployer and  Employee  —  Confidence  —  Loyalty  —  Enthusiasm       75 


CHAPTER  V 

THE   ENTREPRENEUR 

The  Rise  of  Managerial  Ability —  Duties  of  Entrepreneur —  Diffi- 
culties in  Forecasting  the  Future  —  Assumes  Risks  of  Busi- 
ness—  Risks  Shifted  to  Specialists — ■Qualities  Needed  for  a 
Successful  Entrepreneur — Stockholders  the  Risk  Takers  — 
Directors  the  Managers—  Elimination  of  Details —  Delegate 
Work  to  Subordinates  —  Reports  —  Selection  of  Assistants 
—  Discipline — 'Aims  of  Entrepreneur  —  Profits —  Factors 
Affecting  Profits  —  Wages  of  Management — Compensation 
for  Risk  Taking —  Profits  Depend  upon  Successfully  Taking 
Risks  —  Luck  a  Factor  in  Business 97 


CONTENTS  xi 

CHAPTER  VI 
ANALYSIS    OF   COST   ACCOUNTING 

PAGE 

Costs  of  Production  —  Materials — Labor — Overhead  Expenses 
— Division — Evolution  of  Cost  Accounting — Cost  Records 

—  Essentials  —  Importance  of  a  Filing  System  —  Value  of 
Direct  Materials,  how  Ascertained  —  Computing  Costs  of 
Direct  Labor — Methods  —  Diffusion  of  Overhead  Expenses 

—  Methods — Machine  Hour  Method  —  The  Successful  Cost 
System  —  Developed  for  Each  Factory — Bookkeeping  vs. 
Cost  Accounting — Requisites  for  a  Successful  Cost  Expert 

—  Assistance  Given  by  Cost  Accounting — Care  in  Installa- 
tion of  System 121 

CHAPTER  VII 
FACTORY    EFFICIENCY 

Study  of  Factory  Conditions  —  Factors  Affecting  Factory  Loca- 
tion —  Store    Location  —  Factory  Buildings  —  Requirements 

—  Factory  Equipment  —  Care  of  Machinery  —  Tool  Room  — 
Functions — -Materials  —  Store  Room — System  in  Handling 
Materials  —  Permanent  Inventory  —  Dispatching  System  — 
Efficiency  in  Moving  Materials  —  Quality  in  Goods  Purchased 

—  Quality  in  Goods  Produced — Inspection  of  Materials  — 
Business  Failures  Often  Due  to  Neglect  of  Quality — Eco- 
nomical Use  of  Materials — -Use  of  Waste  Products  —  Effi-    , 
ciency  in  Retail  and  in  Wholesale  Enterprises        .         .         .     140 


CHAPTER  VIII 

EFFICIENT   BUSINESS    METHODS 

The  Shipping  Clerk  —  Duties — System  Necessary — Waste  in^ 
Buying  Materials — In  Using  Materials  —  Waste  of  Time — • 
Various  Ways  of  Wasting  Time  —  Energy  —  Inventory' — 
Old  Method — Modern  Method  —  Value  Depends  upon  Ac- 
curacy —  Pricing  of  Goods  —  Standardization  —  Standard 
Products  —  Advantages  —  Standard  Quality  —  Importance  — 
Standard  Tools  and  Machines  —  Standard  Methods  —  Depre- 
ciation—  Maintenance  —  Conditions  Affecting  Durability  — 


xii  CONTENTS 

PAGE 

Obsolescence  —  Depreciation  of  Buildings  —  Methods  for 
Charging  Depreciation  —  The  Cole  Method  —  Necessity  for 
Properly  Charging  Depreciation 166 

CHAPTER   IX 
LABOR   EFFICIENCY 

Specialization  the  Watchword  —  Attitude  of  Employer  toward  Em- 
ployee—  Apprenticeship  System  —  Old  m.  Modern  Method 

—  Technical  vs.  Factory  Schools  —  Driving  vs.  Leading  — 
Contentment — Permanency —  Importance —  Promotion  from 
Ranks — Seniority,  when  Recognized  —  Health  of  Workmen 

—  Medical  Care  and  Inspection  —  Air  and  Humidity  —  Tem- 
perature —  Dust  —  Light  —  Proper  Nourishment  —  Personal 
Safety  —  Prompt  Attention  to  the  Injured  —  Tardiness — Ir- 
regularity —  Attendance  —  Wage    Question  —  Time   Wages 

—  Piece  Rate  —  Antagonism  to  Piece  Rate  —  Proper  Method 
of  Fixing  Rate  —  Profit  Sharing  —  Fatigue  —  Soldiering  — 
Reasons  —  Demands  of  Labor  Efficiency        ....     187 

CHAPTER   X 
BUYING 

Buying  Important  Factor  m  Business  —  Amount  of  Stock  to  Carry 

—  Overstocking  —  Understocking  —  Stock  Records  —  Per- 
petual Inventory —  Knowledge  of  Goods — Knowledge  of 
Costs  —  Quality  —  Knowledge  of  Markets —  Forecasting  Sup- 
ply and  Demand  —  Promptness  in  Filling  Orders  —  Do  Firms 
Keep  Promises  ?  —  Care  in  Filling  Orders  —  Knowledge  of 
Inventions  and  Improvements — Staples  and  Non-staples — 
Buying  Non-staples  —  Resist  Temptation  of  Low  Prices  and 
Large  Discounts  —  Guide  in  Buying  Staples  —  Future  Deliv- 
ery—  Buying  to  Suit  Customers — Goods  to  Carry  in  Stock    218 

CHAPTER  XI 
SELLING 

Good  Selling  Important  in  Business  —  Classes  of  Customers  — 
Jobber— Methods  to   Reach  Retailer— Methods  to  Reach 


CONTENTS  xiii 

PACK 

Actual  Consumer — Retail  Merchant — Methods  Used  by 
Manufacturers  to  Sell  Direct  to  Consumer —  Mail  Order  Busi- 
ness—  Disadvantages  of  Buying  through  the  Mails  —  Why 
are  Customers  Attracted  to  Stores?  —  Value — Service  — 
Style  —  Making  the  First  Sale — Viewpoint  of  Customers  — 
Knowledge  of  Markets — Selection  of  Salesmen — Training 

—  Qualities  Necessary  to  Make  Successful  Salesmen    .        .    236 

CHAPTER  XII 

PRINCIPLES   OF   ADVERTISING 

Growth  of  Advertising  —  A  Creative  Force  —  Two  Classes,  Gen- 
eral and  Direct  —  No  Rigid  Rules  —  Chief  Aims  in  Adver- 
tising—  To  Attract  —  To  Interest  —  To  Cause  a  Desire  to 
Possess  —  To  Decide  to  Possess —  Methods  Used  to  Attract 

—  Essentials  of  a  Good  Illustration — Head  Line  —  Copy  — 
Essentials  for  a  Good  Copy — Confusion — Repetition,  Im- 
portance—  Merit  in  Article  —  Continuity  —  Knowledge  of 
Goods  —  Drawing  Points  —  Methods  for  Stimulating  Desire 

to  Possess — Direct  Command 260 

CHAPTER  XIII 

MEDIUMS   OF   ADVERTISING 

Medium  —  Varieties  —  Each  Distinct  Value  in  Itself  —  Choice 
Demands  Sound  Judgment —  Magazines  —  Characteristics  of 
Magazine  Advertising  —  Newspaper  —  When  Profitable  — 
Writing  Advertisement  for  Paper  —  Trade  Journal  —  When 
Used  —  Booklet —  Essentials  in  Writing —  House  Organ  — 
Classes  —  Important  Features —  Mail  Order  —  Follow-up 
System  —  Catalogue  —  Calendar  —  Essentials  —  Blotter  — 
Handbill —  Poster — Painted  Sign — Electric  Sign  —  Essen- 
tials—  Streetcar  —  Novelty  Advertising        ....    282 

CHAPTER   XIV 

MONEY    AND    CREDIT 

Barter —  Materials  Used  as  Money —  Functions  of  Money  —  Free 
Coinage —  Restricted  Coinage  —  Standard  Money — Redemp- 


xiv  CONTENTS 

PAGB 

tion —  Charges  for  Coinage —  Right  to  Coin  Money  —  Gold 
Coins — Silver  Dollar  —  Bland- Allison  Act — Sherman  Act 

—  Subsidiary  Silver  Coins — Minor  Coins  —  Greenbacks  — 
Gold  Certificates  —  Silver  Certificates —  Bank  Notes  —  Legal 
Tender — Credit  —  Basic  Fundamentals  of  Credit — Charac- 
ter—  Capacity — Capital — -Gathering  of  Credit  Information 

—  Salesmen  —  Attorneys  —  Bankers  —  Mercantile  Agencies 

—  Credit  Associations  —  Traveling  Credit  Men — Refer- 
ences—  Statements  —  Oral  Information  .         .         .         .     307 


CHAPTER  XV 
TRADE   MARKS   AND   COPYRIGHTS 

Trade  Mark,  its  Meaning — Points  out  Origin — Not  the  Creation 
of  Statute  —  Protected  by  Common  Law — Essentials  of  an 
Application  —  Interference  —  Restrictions  —  Cannot  Extend 
Monopoly  —  Infringement — Two  Legal  Meanings  of  Copy- 
right—  Congress,  Power  over  Copyrights — Privileges  Con- 
ferred—  Productions  Subject  to  Copyright — Steps  Neces- 
sary to  Obtain —  Form  of  Notice  —  Restrictions  —  Ad  Interim 
Copyright — Facts  Necessary  in  Application  —  Affidavit  — 
Requirements  —  Periodicals  —  Contributions   to    Periodicals 

—  Copyright   Mail  —  Assignment  —  Time  —  Piratical  Books 

—  Infringement 334 

CHAPTER   XVI 

PATENTS,  TRADE  NAMES,  AND  TRADE  SECRETS 

Trade  Name  —  When  Protected  by  Court  —  Valid  Trade  Names 

—  Goodwill  —  Characteristics  —  Trade  Secret  —  When  Pro- 
tected —  Congress,  Power  over  Patents  —  Patent  a  Reward 
for  Ingenuity —  Conceived  Invention —  Requirements  for  a 
Pdtent  —  Claims  of  Inventor — Persons  Who  May  Acquire 
Patents  —  Essentials  for  Application  —  Interference  —  For- 
eign Patents — Infringement  —  United  States  Courts' Juris- 
diction —  Patent  Suits  —  Procedure  in  Infringement  — 
Fraudulent  Patent  Marking  —  Patent  is  Property  —  Aban- 
donment—  Joint  Inventors  —  Design  Patents       .         .         .     361 


ECONOMICS   OF   BUSINESS 


ECONOMICS  OF  BUSINESS 

CHAPTER  I 

ECONOMIC  BASIS   OF  BUSINESS 

•    The  age  of  the  Greek  and  the  Roman  was  one  of 
prowess  and  conquest  and  a  man's  reputation  depended 
largely  upon   his  deeds    of   valor.     Business  During 
was  considered  unworthy  of  a  gentleman  and  «"iy  ^^^^> 

business  an 

was   carried  on  only  by  the  lowly.     Later,  unworthy 
arts  and  sciences  gained  in  prominence  and  occupation, 
more  respect  was  paid  to  business  as  a  vocation.     This 
was  followed  by  an  age  of  discovery,  opening  up  new 
lands  to  civilization  and  giving  great  impetus  to  trade 
and  commerce.     Still,  a  business  career  was  not  con- 
sidered a  worthy  occupation  for  a  gentleman.     As  time 
advanced,  business  received  more  respect,  until  to-day, 
a  business  career  is  considered  a  worthy  occupation. 
Business  has  never  before  occupied  such  an  im-  changed 
portant  place  in  the  world's  history.    As  a  ^^^^g 
vocation,  it  attracts  the  noble,  the  rich,  the  business, 
lowly  and  the    ambitious.     It    gives    opportunity  to 
exercise  the  greatest  talents   and  to  the  successful,  a 
reward  surpassed  in  no  other  field  of  action. 

A   business   man   has   need   for   drink,    food,  cloth- 
ing  and  shelter,    and   directs  his  efforts   to  Economic 
satisfy  these  needs.     As  a  man  develops,  activities, 
his  wants  become  more  numerous  and  more  diversified. 


2  '.:?•?>:*',. tiGONOMICS  OF  BUSINESS 

He  puts  forth  greater  efforts  to  satisfy  his  increasing 
needs.  These  efforts  to  obtain  the  means  for  the  satis- 
faction of  wants  are  known  as  economic  activities. 
Economic  activities  are  directed  toward  accomplishing 
different  ends  and  are  of  many  varied  forms.  Business 
is  the  name  given  to  many  of  these  forms.  At  first, 
it  simply  meant  those  activities  directed  toward  provid- 
ing a  livelihood,  but  later  the  idea  of  making  a  profit 
Business:  was  added,  and  to-day  business  is  any  form 
its  meaning,  ^f  economic  activity  for  the  purpose  of  secur- 
ing profits. 

Business  of  any  importance  in  early  modern  times  took 
the  form  of  banking  or  merchant  trading.  The  latter, 
including  shipping,  was  tEe"  only  important  enterprise 
involving  large  investments  or  any  degree  of  manage- 
ment. The  successful  outcome  of  the  ventures  of  the 
early  traders  was  less  a  matter  of  shrewd  foresight  than 
The  early  ^^  ^^^  ^^  good  fortune  in  having  favorable 
merchant  weather  conditions.  The  work  of  the  business 
business  man  under  these  conditions  was  simply  to  take 
activities.  advantage  of  the  seasons  and  the  fluctuations 
of  supply  and  demand.  He  was  a  speculative  buyer 
and  seller  and  paid  no  heed  to  production  or  the  proc- 
esses of  industry.  But  with  the  discoveries  and  in- 
ventions which  ushered  in  the  present  industrial  sys- 
tem, the  risk  of  trade  not  only  almost  disappeared,  but 
the  absorbing  interest  of  the  business  man  was  no  longer 
that  of  speculative  trade.  Production  in  all  its  manifold 
phases  has  taken  its  place  and  to-day  is  the  center  of 
business  activity. 

Commodities  have  been  produced  under  the  present 


ECONOMIC   BASIS  OF  BUSINESS  3 

industrial  system  for  a  period  of  about  one  hundred  and 
fifty  years.     For  hundreds  of  years  previous,  HistoncaUy, 

•  manufacturing  took  place  either  in  the  house-  (e^s^^f " 
hold  or  in  simple  workshops  adjacent  thereto,  production. 

( Historically,  four  systems  have  been  employed  to  supply 
the  wants  of  man.  The  first  and  simplest  form  is  the 
family  system.  It  is  found  in  antiquity  and  extended 
as  far  as  the  first  period  of  the  Middle  AgeS.  The  peo- 
ple were  divided  into  small  groups  or  families.  The 
term  family  included  not  only  the  members  FamUy 
of  the  family  but  also  the  slaves  or  serfs  be-  system, 
longing  to  it.  The  Roman  lord  with  his  army  of  slaves 
and  the  feudal  baron  with  his  serfs  are  good  examples  of 
this  economic  period.  Each  family  was  practically  self- 
sufiicient.  Goods  were  rarely  produced  for  outside  con- 
sumption and  consumption  was  usually  confined  to  home 
production. 

With  the  breaking  down  of  th$i  feudal  system,  the 
family  gave  way  to  the  handicraft  system.  The  trades 
were  separated  and  the  workers,  independent.  Handicraft 
no  longer  toiled  in  the  houses  of  the  consumers,  system. 
The  worker  or  artisan  as  he  was  now  called  bought  his 
raw  material,  worked  it  up  in  his  own  house,  used  his  own 
tools  and  sold  the  finished  product  to  the  consumer. 
Everything  was  finished  by  hand  and  this  gave  the  name 
to  the  system.  The  custom  was  to  produce  only  those 
goods  ordered  in  advance.  Custom  tailors  and  cobblers 
of  to-day  are  survivals  of  this  early  system.  The  rapid 
rise  of  an  independent  class  of  artisans  who  conducted 
business  enterprises  followed.  These  formed  themselves 
into  associations  for  mutual  assistance  and  defense,  and 


4  ECONOMICS   OF  BUSINESS 

under  the  name  of  guilds  played  a  very  important  part 
in  the  history  of  the  Middle  Ages. 

One  weakness  of  the  handicraft  system  was  the  un- 
certainty of  selling  the  product.  Few  workmen  took  any 
Weakness  ^^^  ^^^  Confined  themselves  to  making  those 
of  the  goods  that  were  ordered.     During  the  latter 

^^  ^  *  part  of  the  handicraft  period,  merchants  began 
to  play  an  important  role  in  industry.  They  bought  the 
finished  goods  and  took  the  risk  of  selUng  them  at  a 
profitable  price.  This  was  an  improvement  because  it 
relieved  the  artisan  of  the  work  that  he  was  least  pre- 
pared to  perform.  From  this  custom,  it  was  only  a  short 
step  to  the  practice  in  the  domestic  system  where  the 
middleman  owned  the  raw  material  as  well  as  sold  the 
finished  product. 

During  the  latter  part  of  the  Middle  Ages,  the  guilds 
lost  control  of  trade.  The  handicraft  system  slowly 
Domestic  decayed  and  was  succeeded  by  the  domestic 
system.  system  which  prevailed  in  England  from  the 
middle  of  the  fifteenth  to  the  middle  of  the  eighteenth 
century.  The  finished  goods  were  not  only  sold  to  the 
middleman,  but  from  him,  the  raw  product  was  re- 
ceived. The  ownership  of  each  remained  with  the 
middleman,  and  the  workman  was  relieved  of  the  trouble 
of  bujdng  as  well  as  of  selling.  The  artisan  was  no  longer 
independent  but  became  dependent  on  the  middleman, 
who  as  early  as  the  seventeenth  century  began  to  call 
himself  *' manufacturer."  The  workman  still  owned 
his  own  tools  and  worked  at  home  with  the  aid  of  his 
family.  He  usually  lived  in  the  country  and  devoted  a 
part  of  his  time  to  tilling  the  small  plot  of  ground  which 
surroimded  his  cottage. 


ECONOMIC  BASIS  OF  BUSINESS  $ 

The  production  oi  goods  was  divided  between  two 
classes,  the  one  buying  the  raw  material  and  selling  the 
product,  and  the  other  furnishing  labor,  tools  ^^^  classes 
and  workshop.  This  division  of  the  indus-  of  pro- 
trial  system  into  two  distinct  classes,  capi- 
talists and  laborers,  marks  the  beginning  of  a  bitter 
struggle.  Early  in  the  eighteenth  century,  the  first 
strikes  for  higher  piece-rates  took  place,  and  by  the 
middle  of  the  century,  strikes  were  common  and  were 
often  accompanied  by  violence  and  destruction  of  prop- 
erty. 

The  great  mechanical  inventions  and  the  application 
of  steam  power  to  manufacturing  during  the  latter  half 
of  the  eighteenth  century,  introduced  many  Factory 
far-reaching  changes  in  the  industrial  sys-  system, 
tem.  The  workmen  no  longer  owned  their  own  tools 
but  simply  provided  the  labor  which  was  applied  through 
machines  and  in  workshops  owned  by  the  employer. 
The  grouping  of  laborers  and  machinery  in  buildings 
for  the  purpose  of  production  is  known  as  the  factory 
system.  The  factory  in  place  of  the  home  became 
the  unit  of  production.  This  necessitated  a  gathering 
of  laborers  into  centers  and  there  began  a  drifting  from 
the  country  to  the  city,  which  has  continued  with  in- 
creasing proportions  to  the  present  time. 

Those  supplying  the  different  factors  of  production 
became  more  and  more  separated.     It  was  ^^^^^^^ 
only  a  short  time,  until  it  became  the  custom  factory 
for  one  set  of  persons  to  furnish  capital,  an-  ^^*  ®°^* 
other  labor,  and  still  a  third,  land.     With  the  increase  of 
capital  and  the  improvement  of  machinery,  the  factory 


6  ECONOMICS  OF  BUSINESS 

made  it  possible  to  manufacture  goods  in  larger  quan- 
tities and  of  a  more  varied  nature.  New  improvements 
in  facilities  of  transportation  opened  larger  markets  and 
to  meet  the  increased  demand,  production  on  a  larger 
scale  followed.  The  development  of  the  factory  system 
made  the  modern  business  enterprise  possible. 

Each  system  did  not  entirely  do  away  with  its  pred- 
ecessor but  each  in  turn  was  the  predominating  method 
The  factory  ^^  production.  In  our  present  industrial  sys- 
system,  the    tem  the  factory  is  the  chief  method  of  manu- 

chief  type  of 

our  Indus-  facture,  yet  examples  of  the  domestic  system 
trial  system.  ^^^  found  in  swcatshops  and  of  the  handicraft 
in  small  workshops  of  custom  tailors  and  cobblers.  The 
factory  system  is  nevertheless  the  prevailing  type  and 
is  the  center  of  our  present  industrial  system.  It  is 
the  key  of  our  industrial  development  and  the  cause 
of  many  of  our  industrial  conditions,  such  as  the  labor 
and  trust  problems. 

The  factory  system  with  its  extensive  use  of  machinery, 
power  and  capital,  combined  with  extensive  division  of 
labor,  introduced  new  problems  of  administration.  The 
small  business  enterprise,  with  its  simple  organization 
and  methods,  so  characteristic  of  the  domestic  system, 
gave  way  to  the  large  business  unit  with  its  complicated 
organization  and  complex  methods.  Intensive  organiza- 
tion became  a  necessity.  The  independent 
manager,  a  workman  of  the  two  former  systems  became 
newo  ci  .  pai-i^  Qf  an  organization  under  the  guidance  of 
a  new  official,  the  manager.  A  clear  and  definite  line  was 
gradually  drawn  between  managerial  ability  and  labor. 
A  growing  demand  began  for  this  new  type  of  workman 


ECONOMIC   BASIS  OF  BUSINESS  7 

who  assumed  all  responsibility  of  organization  and 
management.  On  the  other  hand,  the  laborer  became 
a  specialist  and  was  deprived  of  all  responsibility  except 
in  doing  efficiently  the  work  assigned  to  him. 

The  development  of  machinery  and  cheaper  facilities 
for  transportation  made  possible  production  on  a  large 
scale  and  in  its  turn,  a  greater  division  of  labor  Division  of 
to  meet  the  increasing  industrial  needs.  Divi-  ^*^°'- 
sion  of  labor  means  the  division  of  the  processes  of  the 
making  of  a  commodity  into  a  number  of  separate  proc- 
esses and  intrusting  a  laborer  with  the  performance 
of  one  or  two  of  these.  A  visit  to  any  large  factory 
shows  a  score  or  more  separate  processes  in  the  making 
of  a  single  commodity  which  in  former  times  was  entirely 
made  by  a  single  individual.  For  instance,  in  making 
a  ready-made  coat,  there  are  thirty-nine  distinct  proc- 
esses and  in  the  making  of  a  pair  of  man's  brogan  shoes, 
no  less  than  eighty-four.  A  distinction  must  be  made 
between  division  of  labor  and  division  of  employments 
where  each  one  devotes  his  entire  time  to  following  one 
branch  of  production,  as  shoemaking,  tailoring,  etc. 

Division  of  labor  greatly  increased  the  number  of 
occupations  but  at  the  same  time,  it  restricted  the  range 
of  work  of  each  workman.     Labor  was  reduced  more 
and  more  to  identical  routine.     This  fostered  invention 
because  as  soon  as  a  process  became  automatic,  a  ma- 
chine was  invented  which  did  the  work  better  E^g^ts  of 
and  more  rapidly  than  human  hands.     Ma-  division  of 
chinery  did  not  entirely  supersede  labor  be- 
cause it  required  operating  and  attending  and  this  gave 
constant  demand  for  skilled  and  unskilled  labor.    Labor- 


8  ECONOMICS  OF  BUSINESS 

saving  machinery  in  displacing  labor  has  not  caused  so 
much  suffering  as  many  would  have  us  believe.  Produc- 
tion increased  at  a  very  rapid  rate  and  this  caused 
a  new  demand  for  labor.  Those  displaced  who  could 
easily  adapt  themselves  to  the  new  conditions  were  soon 
receiving  better  wages  than  they  did  under  the  old 
methods.  Nevertheless,  it  cannot  be  denied  that  there 
was  much  suffering  on  the  part  of  those  who  on  account 
of  age  or  other  causes  could  not  meet  the  demands  of 
the  new  industrial  system. 

Adam  Smith,  during  the  dawn  of  the  factory  system, 
declared  that  division  of  labor  was  limited  by  the  ex- 
Importance  ^^^^  ^^  ^^^  market.  It  is  quite  evident  that 
of  the  the  number  of  articles  that  a  person  would  care 

to  produce  at  any  one  time  depends  upon 
the  opportunity  to  dispose  of  them.  The  average  tailor 
would  not  turn  out  more  coats  than  it  is  possible  for  him 
to  sell  within  his  range  of  sale.  To  divide  the  making  of 
a  coat  between  the  fitter,  the  pocket  maker,  the  lining 
maker,  etc.,  is  not  advisable  unless  as  many  coats  can 
be  sold  as  the  combined  number  produce.  The  mod- 
ern ready-made  clothing  factory  turns  out  thousands 
of  suits  daily  which  would  not  be  the  case  unless  there 
was  market  for  the  output.  The  chief  question  is  to 
get  sale  for  the  product  at  a  price  that  covers  expenses 
of  production  and  leaves  a  margin  of  profit.  As  the 
market  of  a  product  is  limited  so  must  necessarily  be 
its  production.  In  every  case,  the  limit  to  which  pro- 
duction can  be  carried  depends  upon  the  extent  of  the 
market. 

Business  in  the  broadest  sense  includes  all  forms  of 


ECONOMIC  BASIS    OF  BUSINESS  9 

economic  activity  directed  to  the  making  of  profits. 
This  includes  the  production  of  immaterial  Business, 
economic   goods   as   well   as   material.     The  its  broadest 
lawyer's  or  the  doctor's  practice  must  be  con-  ™®*°*°^' 
sidered  as  business  in  the  same  sense  as  a  factory  produc- 
ing material  goods  or  a  grocery  store  selling  groceries.     In 
the  business  world,  it  is  customary  to  give  to  its  limited 
business  a  narrower  meaning  and  to  confine  meaning. 
it  to  those  economic  activities  directed  to  the  creation 
of  utilities  in  material  economic  goods. 

Some  combination  of  land,  labor  and  capital  or  labor 
and  capital,  is  necessary  in  the  production  of  economic 
goods.  Such  a  combination  whether  it  con-  Business 
sists  of  the  fisherman  with  his  crude  home-  ^^^ctw-*' 
made  net  catching  fish  for  the  market  or  the  istics. 
milUon-doUar  corporation  is  a  business  unit.  The 
business  world  is  made  up  of  these  profit-seeking 
units,  each  differing  from  the  other  in  size,  in  complexity, 
in  permanence  and  in  the  character  of  the  work  which 
it  performs.  In  less  progressive  countries  like  China 
or  Russia,  a  large  part  of  the  business  is  still  conducted 
in  small  workshops  and  stores,  and  even  in  the  most 
progressive,  there  are  still  many  units  of  small  size. 
Business  units  ranging  in  size  from  the  single  worker 
using  simple  tools  to  the  gigantic  corporation  emplo3dng 
thousands  of  workmen  attending  machinery  worth  mil- 
lions of  dollars  and  all  united  under  a  central  head  by  a 
complicated  organization  are  found  in  every  branch  of 
our  industrial  system.  The  business  unit  may  be  more 
or  less  of  a  temporary  nature,  as  in  individual  proprie- 
torship or   partnership    where    the    existence  of   the 


lo  ECONOMICS   OF   BUSINESS 

unit  depends  entirely  upon  the  lives  and  the  wishes 
of  those  interested ;  or  it  may  be  permanent,  as  in  the 
corporation  which  continues  its  existence  uninterrupted 
by  the  dissatisfaction,  death  or  retirement  of  its  stock- 
holders. The  advantages  of  a  permanent  organization 
are  so  great  that  the  corporation  is  favored  as  the  best 
type  of  business  organization. 

An  interesting  classification  of  business  units  is  made 
by  grouping  together  those  engaged  in  each  of  the  differ- 
Extractive  ^nt  branches  of  production,  as  extractive, 
industries,  manufacturing,  commercial  and  transport- 
ing of  goods.  Extractive  business  enterprises  are  those 
engaged  in  getting  the  raw  material  from  nature,  as 
agriculture,  fishing,  lumbering  and  mining.  All  later 
processes  of  production  depend  on  these  enterprises  for 
their  supply  of  raw  material.  In  agriculture  and  in 
the  catching  of  fish,  the  business  unit  is  usually  small. 
The  prevailing  type  of  organization  is  individual  pro- 
prietorship, but  partnership  and  corporation  are  grad- 
ually gaining  in  prominence.  Lumbering  which  requires 
more  capital  has  a  larger  unit  and  partnership  and  cor- 
poration prevail.  Mining  with  its  need  of  a  large 
amount  of  capital  is  conducted  almost  entirely  under  the 
corporate  form. 

The  process  of  changing  the  form  of  a  commodity 
and  thereby  increasing  its  value  is  called  manufacturing. 
Manufac-  According  to  its  origin,  *' manufacture"  means 
*^*^^-  ^'  to  make  by  hand,"  but  at  present,  machinery 

plays  such  an  important  part  in  production,  that  the 
word  has  come  to  mean  almost  the  opposite.  The  word 
** manufacturer"  has,  under  the  factory  system,  assumed 


ECONOMIC   BASIS  OF  BUSINESS  ii 

a  new  meaning,  changing  from  hand  worker  to  the  in- 
dividual who  employs  others  to  work  for  him.  Manufac- 
As  we  have  seen,  goods  when  first  made  for  ^^new 
sale  were  made  to  order.     During  the  latter  meaning, 
part  of  the  handicraft  period  the  producer  first  took  an 
interest  in  markets.     An  important  change  took  place 
and  goods  were  chiefly  made  to  be  sold  to  merchants, 
who  found  the  necessary  markets.     Finally,  under  the 
factory  system,  the  limits  of  the  market  increased  and  it 
became   world-wide   rather   than   local.     The  business 
unit  increased  in  size  from  the  little  shop  of  the  cus- 
tom worker  to  that  of  the  milhonaire  corporation. 

Manufacturing  ends  with  the  completion  of  the  form- 
changing  process.     Theoretically,   it  is  not  concerned 
with  the  production  of  raw  material  or  sale  Manufac- 
of   the    finished    product.     Yet    the    manu-  t^^^ng 

r  1  1  .  .   1  1        n     1  •      includes 

facturer  buys  his  raw  material  and  sells  his  commercial 
product,  but  in  so  doing,  he  is  engaged  in  com-  *<^*^^*y- 
mercial  activity  in  addition  to  manufacturing.  Some 
large  enterprises  like  the  Standard  Oil  Company  go  still 
further  and  extract  the  raw  material,  manufacture  the 
finished  product,  carry  their  goods  by  their  own  trans- 
portation Hnes  and  sell  them  to  the  actual  consumer. 

Many  changes  of  ownership  take  place  from  the  time 
the  raw  material  is  extracted  from  mother  earth  until  the 

finished    product   is   placed   in  possession   of, 
,  1  A  •  r  1       •     Commerce, 

the  actual  consumer.     A  great  variety  of  busi- 
ness units  are  necessary  in  making  the  various  exchanges 
and  employment  is  given  to  hundreds  of  thousands  of 
people.     The  transferring  of  ownership  in  various  com- 
modities is    called    commerce.     It    includes    all    eco- 


12  ECONOMICS  OF  BUSINESS 

nomic  activities  which  assist  in  facilitating  exchanges. 
Commercial  Commercial  undertakings  may  therefore  be 
^g!  "  divided  into  two  great  classes,  —  those  en- 
dasses.  gaged  in  the  buying  and  the  selling  of  com- 
modities and  those  assisting  in  bringing  about  the 
exchange. 

The  exchange  of  commodities  is  not  confined  to  raw  ma- 
terials and  finished  product  but  in  the  various  stages 
Stream  of  ^^  production  there  is  a  constant  change  of 
modem  ownership  from  one  person  to  another. 
*"  "*  *  A  farmer  sells  a  hickory  log  to  a  village 
sawyer.  From  the  time  the  first  exchange  takes  place 
until  the  log  becomes  spokes  in  a  buggy,  it  changes  hands 
a  dozen  or  more  times.  The  modern  industrial  system 
furnishes  a  buyer  for  the  raw  material  in  a  local  center, 
and  by  him,  it  is  forwarded  to  the  consumption  center. 
There  it  passes  into  possession  of  wholesalers,  ware- 
house owners  or  commission  merchants  to  await  further 
distribution.  Finally,  the  raw  material  reaches  the 
manufacturer  who  changes  its  form  in  a  way  to  meet 
the  demands  of  the  consuming  public.  After  the  raw 
material  has  been  carried  through  a  series  of  processes 
and  is  made  ready  for  consumption,  it  is  bought  and  sold 
by  wholesale  merchants  to  retailers  who  take  the  finished 
product  to  the  consumer.  Such  is  the  stream  of  in- 
dustry, carrying  the  products  of  mother  earth  from  the 
producer  to  the  consumer. 

The  second  class  of  commercial  activity  including 
Financial  banking,  brokerage,  the  whole  machinery  of 
commercial  credit  investment  and  insurance,  constitutes 
en  erpnses.    ^j^^  financial  side  of  commerce.    The  present 


ECONOMIC   BASIS   OF  BUSINESS  13 

industrial  system,  with  its  gigantic  producing  plants,  its 
immense  trading  establishments  and  its  splendid  facili- 
ties for  transportation,  demanded  instruments  of  credit 
which  would  make  the  transfer  of  goods  or  Develop- 
rather  the  transfer  of  titles,  easy  and  effi-  ^e^t**^*^* 
cient.  An  intricate  and  extensive  credit  system, 
system  resulted,  and  this  dominates  the  whole  business 
world.  Banks  assist  in  providing  depositories  for  cash, 
and  needed  loans,  and  in  trading  in  credit  instruments. 
Produce  exchanges,  by  more  accurately  forecasting  the 
future,  help  manufacturers  to  ehminate  risks.  Broker- 
ages of  all  kinds  give  valuable  assistance  either  in 
the  buying  and  in  the  selling  of  commodities  or  in  dealing 
in  various  credit  instruments.  The  insurance  companies 
aid  in  assuming  in  return  for  a  consideration,  many  risks 
of  production.  All  these  institutions  aid  the  exchange 
of  commodities  in  numerous  ways  and  are  very  helpful 
to  our  industrial  system. 

Finally,  transportation  or  the  carrying  of  goods  and 
persons  from  one  place  to  another  must  be  considered. 
Transportation  increases  the  value  of  a  com-  xranspor- 
modity  by  taking  it  from  place  to  place.  It  t^^on. 
extends  the  market  and  assists  speciaHzation.  In  the 
great  industrial  countries,  the  most  important  factor  in 
transportation  is  the  railroad.  The  modern  railroad 
is  the  most  complex  of  all  modern  enterprises  and  is  an 
example  of  the  best  organized  business  undertaking  of 
modem  industry.  The  business  unit  is  large  with  a 
growing  tendency  to  greater  concentration. 

The  first  and  oldest  method  of  transportation  was  by 
water.     Canals  were  operated  long  before  the  steam 


14  ECONOMICS   OF  BUSINESS 

engine  was  invented.  Great  improvements  cheapening 
Methods  of  ^^  ^^^^  ^^  transportation  followed  the  applica- 
transporta-  lion  of  steam  power  to  boats.  After  the  per- 
fecting of  the  steam  engine  and  the  beginning  of 
railroad  construction,  little  attention  was  paid  to  canals. 
New  inter-  "^^^  during  the  past  decade,  the  urgent  need 
est  in  for  Conservation  of  natural  resources  has  re- 

waterways.  * 

suited  m  a  great  interest  being  taken  not 
only  in  canal  construction,  but  in  the  dredging  of  rivers 
and  waterways.  Finally,  pipe  lines,  pneumatic  tubes 
and  transfer  businesses  must  not  be  omitted,  as  they 
play  an  important  part  in  industry. 

Besides  the  various  methods  of  transportation,  it  is 
necessary  to  note  transmission  of  intelligence.  The 
Trans-  great  improvements  in  the  telegraph  and  the 

mission  of  telephone  have  made  these  instruments  al- 
in  e  igence.  j^^g^  indispensable  in  modern  business.  The 
railroad,  the  steamship,  the  telegraph  and  the  telephone 
have  accomplished  the  task  of  greatly  extending  the 
market.  They  have  made  possible,  greater  specialization 
and  the  production  of  conunodities  on  a  larger  scale. 
Good  facilities  and  cheapness  in  transportation  and 
transmission  of  intelligence  are  very  important  factors 
in  every  business  enterprise. 

The  market  originally  meant  the  public  place  in  a 
town  where  provisions  and  other  articles  were  offered  for 
sale.  Buyers  and  sellers  were  confined  to  the 
immediate  vicinity.  This  idea  is  preserved 
in  the  local  markets  of  many  small  towns.  It  was  some 
time  before  the  outside  trader  was  allowed  to  take  part. 
With  the  changes  introduced  in  industrial  life  under  the 


ECONOMIC   BASIS   OF   BUSINESS  15 

industrial  system,  the  boundaries  of  the  markets  were  ex- 
tended and  became  international.     The  actual  E^gnsion 
presence   of  buyers  and  sellers  is  no  longer  of 
needed  to  constitute  a  market.  The  post  office, 
the  telegraph  and  the  telephone  have  made  this  unneces- 
sary.    The  place  where  prices  are  determined  by  com- 
petition is  a  market.     It  is  immaterial  whether  j^^rket  • 
goods  are  actually  exposed  for  sale  or  bought  its  modern 
and  sold  on  the  basis  of  telegraph  or  tele-  °^®"^^' 
phone   orders.  '  A  market  in  the  modern  sense  is  the 
bringing  together  of  offers  and  demands  which  result  in 
the  exchange  of  definite  quantities  of  goods.     A  market 
is  not  any  particular  place  for  buying  and  selling,  but 
the  general  field  through  which  the  forces  which  deter- 
mine the  price  of  a  commodity  operate. 

Supply  and  demand  are  two  terms  which  are  con- 
stantly used  in  markets  as  well  as  in  other  forms  of  busi- 
ness activity.  The  supply  of  goods  on  the  supply  and 
market  does  not  mean  the  total  stock  in  exist-  demand, 
ence  but  the  amount  which  the  sellers  are  willing  to  sell 
at  a  given  price.  It  is  distinguished  from  stock  which 
is  an  absolute  amount  independent  of  price.  Demand 
in  a  market  means  the  amount  of  goods  which  will  be 
taken  at  a  certain  price.  It  must  not  be  confused 
with  desire  which  lacks  the  ability  to  buy  goods  at 
the  stated  price.  Desire  may  lead  to  demand,  but  it  is 
different  from  it,  and  the  two  terms  must  not  be  used  in- 
terchangeably. 

Each  commodity  has  a  separate  market,  as  wheat 
market,  cotton  market,  coffee  market,  etc.,  and  for 
each  there  is  a  wholesale   as  well  as  a  retail  market. 


i6  ECONOMICS   OF  BUSINESS 

The  wholesale  is  more  extensive  and  with  the  staple 
Kinds  of  ^nd  more  durable  commodities  is  world-wide 
markets.  ^j^^j  international.  The  wholesale  market 
for  staples  in  New  York  responds  very  quickly  to 
changes  in  price  in  English  or  French  markets.  The 
retail  market  is  usually  confined  to  a  particular  locality. 
In  large  cities,  there  are  many  retail  markets  for  the 
same  commodity.  Retail  prices  vary  between  different 
locaUties  and  frequently  from  one  retail  store  to  an- 
other. 

Markets  for  goods  may  be  local,  national  or  inter- 
national. Cheap  bulky  substances  like  ordinary  build- 
Local,  ^^S  brick  and  stone,  and  perishable  commod- 
nationai,  ities  like  milk  and  cream  have  local  markets, 
ternationai  Due  to  excellent  facilities  of  transportation, 
markets.  most  goods  have  country-wide,  and  staple 
articles,  like  wheat,  cotton,  coffee,  etc.,  international 
or  world  markets.  Many  commodities  which  a  few 
years  ago  had  only  a  local  market,  have,  by  the  dis- 
covery of  the  refrigerating  process  and  cheaper  costs  of 
transportation  obtained  access  to  national  and  in  some 
instances,  to  world  markets,  as  for  example,  meat, 
butter,  cheese,  eggs,  fruit  and  vegetables.  Securities 
Markets  possess  similar  Umitations  as  to  markets. 
for  securi-  Bonds  of  governments  as  well  as  bonds  and 
stocks  of  large,  well-known  corporations  have 
international  markets.  They  are  sold  and  held  in  all  parts 
of  the  world.  The  market  for  bonds  of  municipalities  and 
less-known  corporations  is  confined  to  the  countries  where 
they  are  situated,  while  bonds  and  stocks  of  small  local 
corporations  find  sale  only  in  the  immediate  vicinity. 


ECONOMIC  BASIS  OF  BUSINESS  17 

The  question  of  the  market  is  at  present  very  important 
to  every  business  man.  The  extension  of  our  markets  in 
order  to  allow  a  further  extension  of  our  industries  is 
to-day  one  of  the  most  important  economic  problems 
confronting  the  American  people. 

In  the  organization  and  the  working  of  every  busi- 
ness enterprise,  there  is  a  cooperation  of  many  economic 
elements.  A  factory  needs  land,  buildings,  machinery, 
tools,  raw  materials,  money,  goods  in  process  Factors  of 
of  production,  finished  goods  awaiting  sale,  production, 
labor  and  management,  and  a  grocery  store,  land,  build- 
ings, fixtures,  stock,  money,  labor,  and  management. 
So  with  every  business  undertaking,  certain  economic 
elements  are  needed  for  its  operation.  Generally  speak- 
ing, each  economic  element  which  enters  into  industry  is 
a  factor  but  it  is  customary  to  group  the  numerous  fac- 
tors into  four  classes, — land,  labor,  capital  and  manage- 
ment, and  to  subdivide  each  into  nimierous  divisions. 

The  term  land  includes  not  only  the  surface  of  the 
earth,  materials  above  and  beneath  it,  bodies  of  water 
and  what  they  contain,  but  physical  and  nat-  j^^^ 
ural  forces  which  assist  man  in  his  economic 
activities,  as  climate,  winds,  tides,  and  rainfall.     Land 
assists  man  in  a  great  many  ways :     First,  its  aid  in 
a  certain  amount  of   the  earth's  surface  is  production, 
necessary  for  man  to  stand  upon  and  more  is  needed  to 
support  the  buildings  which  are  necessary  to  conduct 
business  enterprises.     Secondly,  inorganic  substances  as 
well  as  plant  and  animal  life  on  land  and  in  water  fur- 
nish industry  with  its  supply  of  raw  materials.     Thirdly, 
the  various  bodies  of  water   furnish  means  of   carry- 
c 


i8  ECONOMICS  OF  BUSINESS 

ing  commodities  and  persons  from  place  to  place.  The 
rivers  and  waterfalls  provide  motor  power  for  many 
of  our  industries.  Fourthly,  natural  forces  assist  man 
Natural  ^^  many  ways.  Without  them,  no  element  of 
forces.  lifg  could  exist  upon  earth.    The  adaptability 

of  climatic  conditions  is  very  necessary  to  the  pursuit 
of  certain  business  enterprises.  In  the  spinning  of  fine 
fabrics,  a  moist  atmosphere  is  needed.  On  the  other 
hand,  in  order  to  preserve  the  aroma  of  tobacco,  a 
dry  climate  is  required  in  the  manufacture  of  cigars  and 
cigarettes.  Some  fruits  like  oranges  and  pineapples 
require  heat,  moisture  and  little  cold  and  only  flourish 
where  these  cUmatic  conditions  prevail.  Excessive  heat 
checks  industry  and  enterprise  and  only  in  temperate 
regions  are  energetic  and  enterprising  people  found. 

The  second  factor  in  business  and  of  co-equal  impor- 
tance with  the  first  is  man.     By  his  efforts,  the  raw 

materials  are  taken  from  mother  earth  and 
Man.  ,  ...  •  r    1 

converted  mto  utihties  to  satisfy  human  wants. 

UtiHties  are  capacities  or  qualities  in  goods  to  satisfy 
UtiUties.  human  wants  and  their  creation  is  production. 
The  efforts  of  man  directed  toward  the  creation 
of  utilities  are  called  labor.  Labor  includes  not  only  the 
efforts  of  persons  engaged  in  the  creation  of  utilities  of 
a  material  form  but  services  that  yield  utilities  of  an  im- 
material nature  as  those  of  a  doctor,  lawyer  or  domestic 
servant. 

Some  err  by  making  a  division  of  labor  into  physical 
„^    .   ,        and  mental.     The  labor  of  the  most  unskilled 

Physical  t_m       i 

and  mental  workman  requires  some  mental  effort  while  the 
**^**'"*  mental  efforts  of  the  high-salaried  manager 


ECONOMIC  BASIS  OF  BUSINESS  19 

are  associated  with  a  certain  amount  of  physical  ex- 
ercise. All  kinds  of  labor  involve  both  physical  and 
mental  efforts  and  dififer  from  one  another  only  in  the 
degree  in  which  the  physical  and  the  mental  efforts 
predominate. 

Land  and  man  are  the  two  primary  factors  of  business. 
Man  alone  can  accomplish  Uttle  without  the  assistance  of 
a  third  factor,  capital.     Capital  consists  of  ^    .  , 
economic  goods  produced  in  the  past  and  used 
for  further  production.     The  capital  of  a  country  there- 
fore consists  of  buildings  used  for  industrial  purposes, 
tools,     machinery,    transportation     systems,  Kinds  of 
money,  raw  material,  finished  goods  awaiting  capital, 
sale,  etc.     Capital  is  not  like  land  and  labor  an  independ- 
ent factor  in  production  but  is  obtained  from  the  ap- 
plication of    human   efforts  to   land  and  is  therefore 
secondary.     The  use  of  capital  in  its  various  concrete 
forms  greatly  assists  production,  makes  possible  great 
specialization,  economizes  labor  and  permits  extensive 
utilization  of  natural  materials  and  forces. 

In  an  ordinary  business  undertaking,  it  is  the  practice 
for  one  class  of  persons  to  supply  land,  another  capi- 
tal, and  still  another  labor.     The  task  of  co-  The 
operating  these  factors  is  a   very  important  ^separate 
one.    The  business  manager  or  entrepreneur  factor, 
who  performs  this  work  has  come  to  occupy  such  an 
important  place  in  modem  business,  that  it  is  necessary 
to  regard  him  as  a  separate  factor,  distinct  from  other 
classes  of  labor.     The  entrepreneur  has  charge  of  all  the 
industrial  forces  and  upon  him  depends,  in  a  large  meas- 
ure, the  success  or  failure  of  a  business  undertaking. 


y 


20  ECONOMICS   OF  BUSINESS 

From  the  standpoint  of  management  and  reward, 
there  are  three  different  methods  of  conducting  a  busi- 
Methodsof  ^^^^  enterprise,  namely,  public  ownership, 
conducting  cooperation  and  entrepreneurship.  The  first 
includes  all  business  undertakings  owned  and 
managed  by  the  government  whether  federal,  state  or 
PubUc  local,  and  in  which  the  government  obtains  the 

ownership,  profits  or  suffers  the  losses,  as  the  electric  Hght 
and  gas  plants  in  many  cities  and  towns,  telegraph,  tele- 
phone and  railway  systems  in  many  foreign  countries, 
the  post  office  in  the  United  States  and  the  tobacco  in- 
dustry in  France. 

The  second  class  includes  all  cooperative  undertakings. 
The  aim  is  to  dispense  with  the  entrepreneur  and  leave  the 
Co5  era-  management  of  a  business  to  workmen.  The 
tive  enter-  workmen  elect  one  or  more  of  their  number 
pnses.  ^^  manage  the   business  and   divide  among 

themselves  the  profits.  The  success  of  a  business  depends 
as  much  if  not  more  upon  able  management  as  upon 
Barriers  to  faithful  workmen.  Laborers  are  rarely  able 
coopera^  to  find  among  themselves  a  man  capable  of 
tion.  managing  a  business.    If  there  is  a  man  of  un- 

usual ability,  jealousy  of  his  superiority  usually  excludes 
him.  If  the  laborers  be  successful  in  securing  a  man  of 
managerial  ability,  the  pay  is  so  low  that  soon  higher 
pay  will  induce  him  to  go  elsewhere.  Cooperative  en- 
terprises have  trouble  in  obtaining  capital.  It  is  im- 
possible to  run  a  business  without  capital  and  the  larger 
the  business  the  more  is  needed.  Laborers  seldom  have 
sufficient  for  the  need  and  in  such  undertakings  it  is 
hard  to  raise  money  on  credit.    Laborers  as  a  rule  are 


ECONOMIC  BASIS  OF  BUSINESS  21 

extremely  jealous  of  one  another.  There  is  always  the 
fear  that  one  might  obtain  a  slight  advantage  over 
another.  This  jealousy  or  mutual  distrust  prevents  the 
proper  cooperative  spirit,  and  is  often  the  cause  of 
failure.  There  is  always  the  danger  that  in  case  of  suc- 
cess a  change  will  be  made  from  cooperative  form  to 
en  trepr  eneur  ship . 

Cooperation  exists  in  many  forms  and  instances  of  its 
operation   are   found   in   all   civiUzed   countries.    The 
greatest  success  has  been  in  distributive  co-  ^^^^^f 
operation  which  consists  of  the  sale  of  finished  coepera- 
products.    The  customers  form  a  stock  com- 
pany, subscribe  for  the  shares,  select  one  of  their  num- 
ber to  do   the   managing  or  hire   a   mana-  Distnbu- 
ger   from   the  outside,  and    start    business.  **^®* 
Such  cooperative  stores  are  frequent  in  Great  Britain 
but  are  not  a  success  in  America  due  to  the  fact  that 
they  cannot   compete  with  large  departmental  stores. 
The   second  form  is  productive  cooperation  or  where 
workmen  combine    to    carry  on   a   produc- 

.  .  ,     .  .        rrn  Productive. 

tive  enterprise  on  their  own  account.    They 
elect   one   or   more   of   their   own   number   to    man- 
age  the  business   and   share    among    themselves    the 
profits.     Cooperative  production   has   met  with   Httle 
success  in  England,  some  in  France  and  a  few  decided 
successes  in  America.    There  are  a  great  many  obstacles 
in  the  way  of  its  general  adoption  as  a  substitute  for 
competition.    The  third  class  is  cooperative  credit  in- 
stitutions and  takes  the  form  of  banks,  loaning  credit  in- 
companies  and  building  associations.     Such  stitutions. 
enterprises  have  made  a  wonderful  advance  during  the 


22  ECONOMICS  OF  BUSINESS 

last  few    years.     Their  greatest    success  has    been  in 
Germany  but  many  individual  instances  are  found  in 
the  United  States.     Finally,  we  have  cooperative  mar- 
keting or  where  producers  form  associations 

Marketing.  ^  ^ 

for  the  purpose  of  marketing  their  produce. 
This  in  the  form  of  fruit  growers'  associations  and 
cooperative  orange  companies  has  been  a  success  in 
America.  Cooperation,  where  possible,  is  the  ideal  sys- 
tem but  the  difficulties  in  the  path  of  its  success  are  so 
great  that  no  great  development  can  be  looked  for  in  the 
near  future. 

The  last  form,  entrepreneurship,  is  the  prevailing 
method  in  our  complex  industrial  system.  The  en- 
Entrepre-  trcprencur  organizes  and  manages  the  busi- 
neurship.  ^^53  enterprise,  receiving  his  reward  from 
profits  or  what  is  left  after  all  expenses  have  been  paid. 
Individual  proprietorship,  partnership  and  corporation 

are   the   three   forms   through  which  entre- 

Varieties.  _  rr^,  .  c  r 

preneurship  operates.  There  is  no  fear  of 
the  entrepreneur  losing  his  place  in  the  modern  indus- 
trial system  as  a  result  of  either  state  ownership  or  co- 
operation. He  will  continue  to  organize  and  man- 
age business  enterprises  because  in  him  the  greatest 
efficiency  can  be  obtained. 

The  development  of  industry  from  the  narrow  sphere 
of  the  home  to  world-wide  scope  has  completely  revolu- 
Effect  of        tionized  every  branch  of  business.     The  busi- 

industriai      ness  unit  has  increased  from  the  simple  work- 
develop-  ,       .         .  .         .  1   .      . 
ment  on        shop  to  the  gigantic  corporation  with  intricate 

business.       ^^^   complex  organization.     Inventions   and 
improvements  in  endless  succession  have  everywhere  in- 


ECONOMIC   BASIS   OF  BUSINESS  23 

creased  the  effectiveness  of  all  business  enterprise  until 
to-day  the  world  is  progressing  at  a  greater  speed  than 
ever  before.  This  is  an  age  of  business.  Business  is 
done  on  a  gigantic  scale.  This  has  increased  the  impor- 
tance of  the  entrepreneur  and  on  him  depends  the 
succces  or  failure  of  our  industrial  system. 

QUESTIONS 

1.  Account  for  the  difference  between  the  present  and 
the  former  attitude  towards  a  business  vocation. 

2.  Chronologically,  what  are  the  foiu:  systems  of  pro- 
duction ?     Give  characteristics  of  each. 

3.  What  have  been  the  effects  of  capital  and  division  of 
labor  upon  the  development  of  our  present  industrial  system  ? 

4.  What  do  business  men  mean  by  business  ? 

5.  What  is  a  market  ?    Why  is  production  said  to  be  lim- 
ited by  the  extent  of  the  market  ? 

6.  What  is  the  difference  between  (a)  supply  and  stock  ? 
(b)  demand  and  desire  ? 

7.  "WTiat  is  a  business  unit  ?     Give  its  chief  characteristics. 

8.  Why  should  managerial  ability  be  placed  in  a  class 
separate  from  labor  ? 

9.  Name  and  explain  the  different  methods  of  undertak- 
ing a  business. 

10.  What  are  the  chief  causes  for  failure  of  cooperative 
enterprises  ? 

11.  What  are  the  different  factors  of  production?    How 
does  each  assist  in  production  ? 

12.  Name  the  different  branches  of  production.     Give  the 
characteristics  of  each. 

13.  Name  and  explain  the  different  varieties  of  cooperation. 

14.  Account  for  the  difference  between  the  present  mean- 
ing of  the  word  manufacturer  and  its  former  meaning. 

15.  Trace  the  evolution  of  (a)  entrepreneur ;  (b)  merchant. 


24  ECONOMICS  OF  BUSINESS 


REFERENCES 

E.  R.  A.  Seligman,  "Principles  of  Economics,"  Chs.  V,  VI, 
XVni,  XXI;  H.  R.  Seager,  "Introduction  to  Economics," 
Chs.  I,  III;  F.  W.  Taussig,  "Principles  of  Economics," 
Vol.  I,  Ch.  X;  J.  A.  Hobson,  "The  Evolution  of  Modern 
Capitalism,"  Chs.  I-VII inc. ;  C.  J.  Bullock,  "Introduction  to 
the  Study  of  Economics,"  Chs.  V,  VI;  R.  T.  Ely,  "Out- 
lines of  Economics,"  Chs.  II,  III,  IV,  DC;  R.  T.  Ely, 
"Evolution  of  Industrial  Society,"  Ch.  Ill;  C.  Bucher, 
"Industrial  Evolution,"  Ch.  IV;  A.  Marshall,  "Principles 
of  Economics,"  Bk.  V,  Ch.  I;  J.  A.  Hobson,  "The  In- 
dustrial System,"  Chs.  I,  II;  T.  Veblen,  "The  Theory  of 
Business  Enterprise,"  Chs.  II,  III;  C.  B.  Going,  "Prin- 
ciples of  Industrial  Engineering,"  Chs.  I,  II;  S.  E.  Spar- 
Img,  "Business  Organization,"  Ch.  I;  F.  T.  Cariton,  "The 
History  and  Problems  of  Organized  Labor,"  Ch.  VIII; 
F.  L.  McVey,  "Modern  Industrialism,"  Part  II;  J.  A. 
Hobson,  "  The  Science  of  Wealth,"  Chs.  I-IV;  J.  T.  Lincoln, 
"  The  Factory." 


CHAPTER  II 

TYPES   OF  BUSINESS   ORGANIZATIONS 

The  entrepreneur's  task  of   coordinating  land,  labor 
and  capital,  and  of   assuming  all   responsibilities  and 
risks  of  business  is  the  bone  and  sinew  of  every  Types  of 
business    enterprise.     The   functions   of    the  o^ganS- 
entrepreneur  may  be  performed  by  a  single  tions. 
person  or  by  several,  according  to  the  form  of  business 
organization.     Three    types   of   business    organization, 
single   entrepreneurship,    partnership  and   corporation, 
give  scope  for  the  exercise  of  the  entrepreneur's  functions. 
*  The  simplest  form  of  business  organization  is  that  in 
which  a  single  person  controls  the  whole  enterprise/' 
Any  individual  may  start  himself  in  business  g.^^  j^ 
without  any  legal  formality  except  in  some  entrepre- 
cases  where  payment  of  a  license  fee   is  re-  ^^"^^  ^* 
quired.     He  may  do   his   own  work  and  use  his  own 
capital,  as  the  carpenters,  doctors  and  lawyers  usually 
do,  or   he  may  employ   hired  workmen  and  borrowed 
capital. 

A  person  may  engage  in  any  kind  of  business  unless 
forbidden  by  law  or  when  necessary  fulfilling  certain 
legal  requirements.  In  the  United  States,  Limitations 
a  business  man  cannot  engage  in  carrying  the  ^dert^-^^ 
mails  or  coining  money  because  these  are  i»gs. 
monopolies  of  the  government ;  cannot  conduct  a  pubhc 
lottery  because  it  is  forbidden  on  the  groimds  of  public 

25 


26  ECONOMICS  OF  BUSINESS 

policy ;  and  cannot  engage  in  certain  enterprises  Hke  the 
liquor  trade  without  first  obtaining  a  special  license. 

The  obligations  of  single  entrepreneurship  are  the 
personal  obligations  of  the  proprietor.  All  his  possessions 
are  at  the  mercy  of  his  business  risks.  If  a 
business  man  possesses  considerable  property 
which  has  no  connection  with  his  business  undertaking 
and  should  fail  every  dollar  that  he  owns  can  be  taken  to 
meet  his  obligations.  Few  men  have  the  capital  to  con- 
duct a  large  enterprise,  and  if  they  have,  few  wish  to  stake 
their  whole  fortune  on  a  single  business  undertaking. 

Single  entrepreneurship  is  obviously  only  adapted 
to  a  limited  number  of  business  undertakings :  those 
Type  where  the  capital  required  for  the  enterprise 

few^enter-  ^^  ^^^^^  5  ^^^^^  where  the  risks  of  the  business 
prises.  are  shght ;  those  where  the  credit  and  capital 

of  the  individual  are  adequate ;  and  those  where  operation 
and  management  are  not  too  intricate  or  onerous  for 
the  average  business  man.  These  requirements  are 
suitable  in  agriculture,  the  retail  trade  and  local  manu- 
facturing industries,  and  in  these  fields,  this  form  of 
organization  still  predominates. 

The  simplest  form  of  organization  in  which  two  or 

more  persons  are  associated  for  the  purpose  of  carrying 

on  business  is  a  partnership.  "A  partnership 

Partnership.    .  ,  .        .         ^.  t-  x-  x- 

IS  a  combmation  of  two  or  more  persons  who 

agree  to  conduct  a  business  enterprise  for  their  common 

benefit,"  and  are  jointly  and  severally  responsible   for 

its  management.     It  is  formed  by  the  agree- 
Formatioii. 

ment  of  the  parties  interested.     The  agreement 

is  usually  written,  but  it  may  be  oral  or  even  implied  from 


TYPES   OF  BUSINESS   ORGANIZATIONS       27 

the  actions  of  two  or  more  persons.  Any  lawful  business 
may  be  carried  on  and  a  change  may,  at  any  time,  be 
made  from  one  kind  of  business  to  another.  The  partners 
are  all  on  an  equal  basis  in  the  management  of  an  enter- 
prise. Each  represents  the  partnership  fully  and  can 
make  contracts  for  it  without  consulting  the  other 
partners,  and  any  contracts  so  made  are  binding  on  all. 

Each  partner  is  personally  liable  to  the  full  extent  of 
his  wealth  for  all  debts  contracted  by  the  partnership, 
as  well  as  for  those  contracted  by  any  mem-  unUmited 
ber  in  the  ordinary  course  of  business.    This  HabUity ; 
is  known  as  unlimited  liability  and  is  one  of 
the  great  drawbacks  of  this  form  of  business  organization. 
An  exception  to  unlimited  liability  is  made  in  certain 
states,  where  laws  provide  for  limited  partnership,  in  which 
certain  partners  called  "special"  are  respon-  special 
sible  for  only  the  amount  that  they  have  in-  pawners, 
vested,  but  are  not  allowed  any  active  part  in  the  manage- 
ment of  the  business. 

Partners  may  have  written  agreements  among  them- 
selves concerning  the  amount  of  money  each   should 
invest,  the  division  of  profits  and  losses,  and  Agreements 
the  various  duties  each  should  perform.     Such  jea^e^from 
agreements  do  not  release  a  member  from  Uabmty. 
debts  incurred  by  a  firm  or  its  members  in  the  ordinary 
course  of  business.     They  only  give  a  basis  for  recovery 
by  legal  action  of  personal  loss  from  other  members  of 
a  firm.     The  partnership  is  not  recognized  as  a  legal 
business  unit,  and  hence  in  every  legal  action  ^ot  a  legal 
the  name  of  every  partner  must  appear.    A  ""**• 
partner  cannot  make  a  contract  with  his  firm,  or  bring 


28  ECONOMICS  OF  BUSINESS 

suit  against  it,  or  be  sued  by  it,  any  more  than  he  can 

act  for  or  against  himself. 

A  partner  cannot  assign  his  partnership  to  another. 

He  must  call  for  a  distribution  of  assets  and  retire.     This 

^.    ,   .       dissolves  the  partnership,  and  if  the  remain- 
Dissolubon.    ,  .  .  .  ,      ,       . 

mg  partners  wish  to  contmue  the  busmess,  a 

new  partnership  must  be  formed.     Frequently  a  new 

partnership  continues  business  under  the  old  name.    When 

a  partner  wishes  to   retire,  and  a  basis  of  settlement 

cannot  be  reached,  he  must  ask  the  court  to 

Methods.  .  .       '  .     ,  ,       ,       . 

appoint  a  receiver  to  wind  up  the  business. 
A  new  member  cannot  be  taken  into  a  partnership  with- 
out the  consent  of  all  the  members,  in  which  case,  a  new 
partnership  is  formed.  A  partnership  may  be  dissolved 
at  any  time  at  the  will  of  any  partner.  The  date  of  ter- 
mination may  be  written  in  the  contract.  A  partnership 
comes  to  an  end  by  the  death  or  insolvency  of  a  member, 
by  mutual  agreement,  by  court  action,  by  the  retiring 
of  a  partner,  or  by  the  admission  of  a  new  member. 

Partnerships,  from  the  character  of  the  business  con- 
ducted, may  be  divided  into  two  classes,  —  general  and 
special.    A  general  partnership  is  one  created 

Genersl. 

for  the  purpose  of  conducting  some  general  line 
of  business,  while  a  special  is  one  formed  for  a  special 
^     .  business    transaction.     Ordinary  commercial 

Speciftl. 

and  professional  partnerships  are  of  the  first 
t3^e,  while  those  formed  for  the  purpose  of  improving  a 
plot  of  real  estate  or  perfecting  a  patent  are  examples  of 
the  second  class. 

According  to  the  laws  of  many  states,  a  joint  stock 
company  is  a  partnership  authorized  by  law  to  act  under 


TYPES   OF  BUSINESS   ORGANIZATIONS       29 

a  corporate  name,  to  be  subject  to  certain  con-  joint  stock 
ditions,  and  to  issue  stock  to  its  members.     It  company, 
is  continuous  and  any  member  may  transfer  his  stock. 
A  new  partner  may  be  introduced  with  or  without  the 
consent  of  the  members,   and  without  dissolving  the 
previous   organization.     The   stock   represents   the  in- 
terest  of   the   members   in  the   profits   and  character- 
property  of  the  business.     A  board  of  directors  *^*^*^®- 
or  trustees  is   elected  to   control   the  business  and  no 
member  has  the  power  to  act  for   the   company  as  a 
whole.    A  joint  stock  company  sues  and  defends  in  the 
name  of  an  officer  empowered  for  that  purpose.      It  is 
formed  hke  an  ordinary  partnership  by  the  agreement 
of  members  among  themselves.     The  members  are  like 
joint  partners  in  that   they  are  individually  liable  for 
debts  of  the  company.     A  joint  stock  company  lacks  the 
attractive  features  of  a  corporation  and  is  an  infrequent 
form  of  business  organization. 

The  partnership,  until  fifty  years  ago,  was  the  pre- 
vailing type  of  business  organization,  but  with  the  in- 
crease in  size  of  the  business  unit  and  the  use  of  Advantages 
large  sums  of  capital  in  business  enterprises,  the  of  partner- 
unlimited  liabiHty  of  the  partnership  proved  ^  ^* 
a  drawback  and  the  corporation,  with  limited  liability, 
came  into  prominence.  The  partnership  nevertheless 
has  certain  advantages.  It  can  be  easily  organized 
and  dissolved.  It  escapes  many  of  the  taxes  levied  upon 
corporations.  It  possesses  elasticity,  that  is,  the  ease 
with  which  the  relations  of  the  partners  among  them- 
selves may  be  determined  and  altered  to  meet  changing 
conditions.     Partnership  is  a  favorite  form  of  organiza- 


30  ECONOMICS   OF  BUSINESS 

tion  among  professional  men.  It  still  holds  a  prom- 
inent place  in  the  mercantile  business  and  in  small 
local  manufacturing  enterprises.  But  wherever  the 
business  unit  is  large,  and  a  large  amount  of  capital  is 
involved,  it  has  given  place  to  the  corporation. 

The  written  agreement  by  which  parties  enter  into  a 
partnership  is  usually  called  articles  of  copartnership. 
Articles  of  ^^  ^^  necessary  that  the  parties  forming 
copartner-     a  partnership  should  have  a  distinct  under- 

ship. 

standing  of  all  important  matters  concerning 
the  undertaking,  and  consequently,  the  articles  are  of  the 
utmost  importance  and  the  greatest  care  should  be  ex- 
ercised in  drawing  them.  When  once  drawn  and  signed, 
no  changes  can  be  made  unless  assented  to  by  all  members 
of  the  partnership.  The  articles  differ  with  the  nature 
of  the  business  and  the  character  of  the  work  to  be  per- 
formed but  some  things  are  common  to  all  partnerships, 
and  with  these,  extreme  care  should  be  taken  to  have 
everything  clear  and  definite. 

The  articles  should  first  contain  the  names  of  the  con- 
tracting parties  with   their   addresses,    followed  by   a 

statement  that  the  parties  do  by  this  instru- 
Essentials.  .  ^  i  .         t^  t 

ment  enter  mto  a  partnership.  Persons  le- 
gally capable  of  making  a  contract,  partnerships  and 
in  some  cases  corporations  can  enter  into  partnership. 
The  date  of  commencement,  the  duration  and  the  name 
of  the  firm  should  be  stated.  The  nature  of  the  business 
should  be  carefully  specified  and  the  name  of  the  place 
where  it  is  to  be  conducted  should  be  given.  The  amount 
and  the  kind  of  capital  that  each  one  invests  should  be 
stated  and  the  apportionment  of  profits  and  losses  should 


.  TYPES   OF   BUSINESS   ORGANIZATIONS       31 

be  provided  for.  The  duties  and  rights  of  each  partner 
should  be  carefully  outlined  because  this  frequently  pre- 
vents later  misunderstandings.  Lastly,  provision  should 
be  made  for  the  final  settlement  of  the  affairs  of  the 
partnership. 

*  A  corporation  is  an  association  of  two  or  more  persons 
formed  and  authorized  by  statute  to  act  as  a  single 
person  in  the  conduct  of  a  specified  business.'^ 

Corporation. 

An  exception  to  this  definition  may  be  made 
where  a  single  person  is  made  a  corporate  body  in  order 
to  obtain  certain  legal  capacities,  especially  that  of  per- 
petuity, which,  as  a  natural  person,  he  would  soie  cor- 
not  have.     A  king  and  bishop  are  in  Eng-  potation, 
land  examples  of  sole  corporation,  as  it  is  called,  but  in 
the  United  States,  very  rare  instances  are  found. 

Members  of  a  corporation  are  not  the  corporation. 
They  compose  it,  but  the  corporation  is  a  separate,  dis- 
tinct, artificial  person,  possessing  an  entity  and   -,         ^ 
existence  of  its  own,  entirely  apart  from  that  of  a  separate 
its  members.     A  corporation's  property,  con-  ®"  ^* 
tracts  and  debts  belong  to  the  corporation  itself  and  not 
to  the  members.     Under  its  corporate  name,  a  corpora- 
tion may  buy  and  sell,  may  contract  debts,  may  sue  and 
be  sued  and  may  enter  into  all  kinds  of  legal  contracts 
just  as  individuals  may  do. 

Corporations  may  be  divided  into  two  distinct  classes, — 
public  and  private.  ^^PubHc  corporations  are 
those  formed  by  the  people  of  a  community 
for    governmental    purposes,    as   the    municipal    cor- 
porations of  cities,  towns  and  villages.     AH 

,  .  .  .  Public, 

other  corporations  are  private  corporations.'* 


32  ECONOMICS   OF   BUSINESS 

Public-service    corporations,     such   as    railroads,    tele- 
phone and  telegraph  systems,  electric  light  and  gas  com- 
panics,  are  frequently  called  quasi-pubhc  but 
as  they  are  conducted  for  profit,  must  be  classed 
as  private  corporations. 

Private  corporations  may  be  divided  into  two  classes, 
—  non-stock  and  stock.  Non-stock  or  membership 
Classes  of  Corporations  are  corporations  created  either 
private  for  the  conmion  benefit  of  all  members,  or  for 

corpora  on.  ^^^  purpose  of  serving  the  public  at  large. 
Nearly  all  churches,  church  clubs,  educational,  charitable, 
and  social  organizations  belong  to  this  class,  as  well  as 
mutual  insurance  companies,  stock  exchanges 
and  other  similar  organizations.  There  is  no 
capital  stock,  consequently  no  stock  certificates,  but 
Character-  usually  Certificates  of  membership  are  issued  to 
istics.  members.    The  members  share  equally  in  all 

privileges  of  membership  irrespective  of  the  amount  that 
each  has  invested.  The  average  business  man  pays 
little  heed  to  this  type  of  organization,  but  is  concerned 
with  stock  corporations. 

Stock  corporations  are  created  for  the  purpose  of  con- 
ducting business  enterprises.  They  have  capital  stock 
divided  into  transferable  shares.  The  shares 
are  obtained  either  by  purchase  from  the  cor- 
poration, or  by  transfer  from  a  stockholder.  Stock 
corporations  are  conducted  for  profit  and  the  profits 
are  divided  and  distributed  among  the  stockholders  in 
Character-  proportion  to  the  number  of  shares  that  each 
istics.  possesses.     The  control  of  a  corporation  lies 

with  the  stockholders  who  act  in  meetings  and  by  vote. 


TYPES  OF  BUSINESS   ORGANIZATIONS       33 

With  few  exceptions,  each  share  of  stock  entitles  the 
owner  to  a  vote  in  the  stockholder's  meeting.  Hence, 
those  who  own  or  control  the  majority  of  the  shares 
control  the  corporation. 

Stock  corporations,  according  to  the  character  of  the 
work  that  they  perform,  may  be  divided  into  four  classes, 
—  industrial,  commercial,  public  service  and  stock  cor- 
financial.    The  first  class  includes  manufac-  5?^.^,**^°.^ . 

oiviaea  into 

turing  and  mining  companies,  and  the  second,  four  classes, 
wholesale  and  retail  corporations.  The  two  include 
the  greater  number  of  business  corporations.  industrial: 
Corporations  which  control  railroads,  tele-  commercial, 
graph  and  telephone  systems,  electric  light,  water,  gas 
and  power  enterprises,  form  the  third  class.  pubUc  serv- 
Under  certain  restrictions,  these  are  allowed  ^*^®- 
to  exercise  the  right  of  eminent  domain  and  frequently 
are  given  special  and  exclusive  privileges  on  the  public 
highways.     The  last  class  includes  banks,  in- 

.  .  ,       1         Financial. 

surance  companies,  trust  companies  and  other 
similar  institutions  handhng  the  funds  and  investments 
of  the  public  and  with  the  exception  of  national  b^nks, 
which  are  under  federal  control,  is  subject  in  each 
state  to  special  statutory  legislation  and  some  form  of 
governmental  supervision.  In  all  cases  of  management 
and  control  not  regulated  by  special  statutes,  financial 
corporations  are  subject  to  the  general  laws  governing 
ordinary  stock  corporations. 

A  corporation  is  a  creature  of  the  law.     The  power  to 
form  a  corporation  may  be  given  by  special  Corpora- 
statute   of   the    legislature   for  a   particular  b^speci^'*^ 
corporation   or   by   a   general   act   covering  statute. 


34  ECONOMICS  OF  BUSINESS 

the  formation  of  all  corporations.  Formerly,  the  first 
method  prevailed,  but  the  granting  of  powers  to  cor- 
porations was  made  a  legislative  favor,  and  much  abuse 
resulted.  To  abolish  the  abuses,  all  states  have  passed 
general  laws  governing  the  formation  of  corporations. 
By  general  The  Statutes  prescribe  the  conditions  upon 
laws.  which  a  charter  may  be  obtained,  and  dele- 

gate to  a  state  official  the  work  of  passing  upon  each  ap- 
plication and  granting  it  if  the  legislative  requirements 
are  fulfilled.  These  statutes  are  alike  in  their  general 
scope,  but  vary  in  detail  from  state  to  state. 

The  corporation  at  the  present  time  is  the  favorite 
type  of  business  organization.  This  is  largely  due  to 
the  fact  that  it  possesses  many  advantages 
over  other  t3^es.  The  corporation  con- 
tinues uninterrupted  by  the  dissatisfaction,  the  insol- 
Perma-  vency,  the  death,  or  the  retirement  of  its 
nence.  stockholders.     The  stockholders  may  change 

from  time  to  time  but  this  does  not  affect  the  cor- 
poration. A  corporation  is  a  separate  unit  apart 
from  the  persons  who  own  it.  The  death  of  a 
stockholder  simply  means  the  transfer  of  stock  to 
some  one  else.  The  control  is  vested  in  the  offi- 
cers and  the  death  of  one  simply  means  finding  an- 
other to  take  his  place.  Charters  are  granted  in  some 
states  for  only  a  limited  period  of  years,  and  on  ex- 
piration must  be  renewed  or  the  corporations^  cease  to 
exist.  Sometimes,  the  period  of  existence  is  stipulated 
in  the  charter;  if  so,  the  corporation  comes  to  an  end 
when  the  time  limit  expires.  Some  states  reserve  the 
right  to  forfeit  charters  for  misuse,  non-use,  or  abuse  of 


TYPES   OF   BUSINESS   ORGANIZATIONS       35 

power.  Unless  there  is  a  time  limit  by  charter  or  by 
statute,  or  unless  the  right  of  forfeiture  is  reserved,  the 
duration  of  a  corporation  is  perpetual.  The  existence 
of  a  corporation  is  terminated  by  four  legal  ^^ 

methods :     by    expiration  of    the   time    for   terminating 
which  the  charter  is  granted ;   by  voluntary 
dissolution;    by  insolvency   and  by  forfeiture   of   the 
charter  for  misuse,  non-use,  or  abuse  of  powers. 

The  liability  of  stockholders  i^  limited  by  the 
amount  of  money  invested  for  stock  in  a  corporation. 
The  enterprise  may  prove  a  failure  and  incur  Limitation 
great  indebtedness,  yet  the  stockholders  will  ofiiai>aity- 
lose  only  their  investment.  This  is  quite  a  contrast  to 
a  partnership,  where  a  partner,  in  such  a  case,  would  lose 
not  only  what  he  had  invested  but  would  be  personally 
liable  for  all  unpaid  debts  of  the  partnership.  There  is 
also  a  subscription  liability.     Subscribers  for  „  , 

Subscnp- 

stock  are  Kable  to  the  corporation  for  the  full  tion  liabU- 
par  value  of  the  subscribed  stock.  If  subscrip-  ^^' 
tions  have  not  been  paid,  the  corporation  or  its  creditors 
can  force  payment  for  the  unpaid  part  due  the  company. 
Again,  if  a  corporation  without  the  consent  of  its  stock- 
holders sells  stock  at  less  than  par,  the  creditors  can  force 
extra  payment  to  make  the  stock  full  paid  at  par. 

There  are  a  few  exceptions  to  the  general  principles 
of  hmited  liability,  where  special  Habilities  have  been 
granted  by  statute.  Stockholders  of  national  Double 
banks,  in  case  of  failure,  are  Hable  not  only  for  ^^^'^^y- 
their  investment,  but  for  an  additional  sum  equal  to  the 
par  value  of  the  stock  that  they  own.  Many  states 
impose  this  extra  liability,  or  double  liability  as  it  is 


36  ECONOMICS  OF  BUSINESS 

called,  on  banking  and  insurance  corporations,  while 
Minnesota  and  California  exact  it  from  all  corporations. 
In  New  York  State,  stockholders  are  liable  to  employees 
and  servants  for  all  wages  due  by  the  corporation. 

The  limitation  of  liability  has  been,  in  many  cases, 
the  chief  cause  for  formation  of  corporations  and  in 
impor-  recent  years  has  led  many  partnerships  to 
Umited^  become  corporations.  Every  enterprise  in- 
Uabiuty.  volves  a  Certain  amoimt  of  risk.  If  every  indi- 
vidual who  bought  shares  in  a  corporation  were  liable  to 
the  full  extent  of  his  wealth,  investment  would  be 
checked.  It  is  an  easy  matter  to  get  a  person  to  buy  a 
few  shares  in  a  venture  where  his  liability  is  limited  by 
his  investment.  Limited  liabihty  has  been  a  boon  to 
industry,  and  has  largely  been  the  cause  of  the  en- 
trepreneur finding  ready  capital  for  investment. 

The  ease  with  which  stock  may  be  transferred  from 
one  person  to  another  is  a  decided  advantage  of  a  corpora- 
tion. It  allows  the  investing  of  varying 
abiuty  of  amounts  and  gives  a  proportionate  share  in 
shares.  ^^^  control  and  profits  of  a  business  enterprise. 
If  a  person  buys  stock,  and  wishes  to  dispose  of  it,  he 
can  easily  find  a  buyer.  This  is  a  decided  advantage  over 
a  partnership  where  a  partner  frequently  has  great  diffi- 
culty in  disposing  of  his  interest  in  an  enterprise. 

The  corporation  has  greatly  stimulated  the  develop- 
The  draw-  ^^^^  ^^  industry  through  the  ease  of  invest- 
"ig  of  ment,  and  the  consequent  inducement  to  save 

Smy  ^°°^  and  bring  into  existence  new  forms  of  capital, 
sources.  During  the  eighteenth  and  the  early  part  of 
the  nineteenth   century,   the  range  of  investment  for 


TYPES  OF  BUSINESS  ORGANIZATIONS       37 

the  public  was  almost  entirely  confined  to  dealing  in 
governmental  obligations.     In  fact,  the  early  stock  ex- 
changes traded  only  in  these  forms  of  securi-  ^.^j  ^^^^^ 
ties.     The  merchants  and  traders  had  outlet  of  invest- 
for  their  surplus  capital  in  the  extension  of 
business  and  trade,  but  if  an  ordinary  investor  did  not 
care  to  buy  government  securities,  the  only  other  outlet 
for  investment  of  his  savings  was  buying  and  improv- 
ing real   estate.     The   large    amount   usually   needed 
for  buying  government  securities  or  real  estate  left  no 
form  of  investment  open  to  the  small  investor.     The  cor- 
poration, with  its  transferable  shares  in  small  amounts, 
filled  a  much  needed  want  and  soon  won  favor  with  the 
small  investor.     It   allows   the  investment   of   capital 
in  small   as  well   as   large   amounts.     A  man  with  a 
hundred  dollars  has  an  opportunity  to  invest 
it  and  to  draw  a  good  rate  of  interest  thereon,  potation 
On  the  other  hand,  transferable  shares  greatly  yestoeSs 

increase  the  sources  from  which  corporations  of  smau 

amounts, 
both  large  and  small  draw  their  capital.     The 

average  corporation  draws  its  capital  from  many  thousands 
of  investors,  comprising  frequently  not  only  the  humble 
workman,  but  the  wealthy  aristocrat.  The  United  States 
Steel  Corporation  has  upwards  of  a  hundred  and  twenty 
thousand  shareholders,  composing  all  classes  from  the 
ordinary  laborer  to  the  millionaire,  and  scattered  not 
only  through  all  parts  of  the  United  States,  but  also  in 
many  foreign  countries.  Many  an  entrepreneur  in- 
corporates a  venture  and  raises  the  needed  money  by 
selling  the  stock  in  small  quantities  to  his  relatives  and 
acquaintances. 


38  ECONOMICS   OF  BUSINESS 

The  control  of  a  corporation  rests  with  its  stockholders, 
who  act  at  regular  meetings  and  by  vote.     Business  can 
be  transacted  only  by  duly  appointed  officers 
and  each  officer  has  his  duties  clearly  defined. 
An  inefficient  officer   may  be  dismissed,  or  an  entire 
change  of  management  be  made,  simply  by  the  process  of 
election  at  the  regular  meeting.     From  the  foregoing,  it 
is  seen  that  the  advantages  of  corporation  over  partner- 
ship  and   single   entrepreneurship   are    great.     Where 
the  non-corporate  forms  of  organization  have  proved 
dangerous  in  large  enterprises,  the  corporation, 

Corporfl— 

tion  popular  with  its  Hmited  HabiUty,  its  ease  in  transferring 
biSiess  stock,  and  its  flexible  business  administration, 
organiza-  has  met  the  demands  of  the  business  world 
and  has  become  the  most  popular  form  of 
business  organization. 

In  contrast  with  the  advantages,  certain  disadvantages 
are  found.  Most  states  charge  fees  from  a  small  nominal 
^.    ,  sum  to  an  amount  that  is  almost  a  tax  on  in- 

Disadvan- 

tagesto  dustry.  The  organization  fee  of  the  United 
corporation,    g^^^^^  g^^^j  Corporation,  if  it  had  taken  out  its 

charter  in  Pennsylvania  where  most  of  its  mills  are  located. 
Increased  would  have  been  several  times  greater  than  its 
expense.  fgg  fQj-  incorporation  in  New  Jersey.  Many 
states  have  lower  fees  than  New  Jersey,  but  other  dis- 
advantages more  than  offset  the  lower  initial  cost.  Most 
states  also  charge  an  annual  franchise  tax  or  a  charge 
for  the  privilege  of  doing  business  as  a  corporation. 
Special  taxes  are  sometimes  levied  on  corporations,  as  the 
federal  corporation  tax,  which  requires  that  corporations 
doing  business  in  the  United  States  pay  annually  into 


TYPES   OF   BUSINESS   ORGANIZATIONS       39 

the  federal  treasury  one  per  cent  of  their  net  profits 
over  and  above  five  thousand  dollars.  There  are  other 
additional  expenses  incidental  to  the  making  out  of 
reports  required  of  corporations  in  most  states,  to  the 
holding  of  annual  meetings  of  stockholders,  etc.  These 
expenses  in  a  large  corporation  receive  Httle  considera- 
tion, but  with  small  enterprises  they  may  be  of  sufficient 
importance  to  prevent  corporate  formation. 

A  corporation  is  limited  in  its  business  operations 
to  the  powers  given  in  its  charter,  or  allowed  in  statute. 
Formerly  most  of  the  states  allowed  corpora-  Limited 
tions  to  conduct  only  one  Hne  of  business,  powers. 
This  often  proved  a  serious  drawback  and  prevented 
the  undertaking  of  business  ventures  that  would  be  prof- 
itable. The  majority  of  the  states  have,  during  recent 
years,  become  more  liberal  in  this  respect,  and  little  or 
no  restraint  is  at  present  placed  upon  corporate  organ- 
izations as  to  the  kinds  of  business  enterprise  that  may 
be  named  in  the  charter  and  undertaken. 

The  credit  of  a  corporation  depends  upon  the  capital 
or  resources  of  the  business,  while  in  a  partnership  it 
is  dependent  upon  the  entire  wealth  of  the  Limitation 
partners.  Many  corporations  with  doubtful  o^  credit, 
business  resources  find  it  difficult  to  obtain  credit. 
Frequently,  the  creditors  in  case  a  partnership  is  changed 
to  a  corporation  are  reluctant  about  extending  credit 
as  freely  as  they  had  previously  done.  This  disadvan- 
tage often  proves  a  handicap  in  small  enterprises,  but  it 
is  of  Httle  consequence  with  large  business  undertakings. 

Corporations  are  compelled  to  make  annual  or  more 
frequent  reports  of  their  business  operations  and  finan- 


40  ECONOMICS   OF  BUSINESS 

cial  standing  to  state  or  federal  officers.  This  gives 
^  ^,.  .  a  certain   amount   of   publicity  to    business 

Publicity.  .  .  ,       . 

operations.  Sometimes  business  men,  m  order 
to  avoid  this  publicity,  retain  the  partnership  form  of 
organization. 

The  advantages  of  the  average  corporation  greatly 
outweigh  the  disadvantages.  This  accounts  for  the 
Advantages  popularity  of  the  corporate  form  and  the  con- 
dTsadvan-  stant  change  of  partnerships  into  corpora- 
tages.  tions.    The  corporation  is  indispensable   to 

our  industrial  system.  The  increasing  size  of  the  business 
unit  with  its  greater  complexity  brings  the  corporation 
into  greater  favor  because  it  is  the  only  form  of  or- 
ganization constituted  for  conducting  business  under- 
takings on  a  large  scale. 

The  charter,  the  instrument  which  creates  a  cor- 
poration, is,  in  form,  merely  an  appHcation  for  a  charter. 

The  incorporators  or  their  attorney  draw  the 

application  complying  with  the  provisions  of 
the  general  incorporating  law  of  the  state  and  present  it 
How  to  with  the  required  fee  to  the  proper  state  official, 
obtain.  'pj^g  official,  usually  the  secretary  of  state,  has 

not  the  authority  to  withhold  his  signature  from  any  in- 
strument properly  drawn  and  complying  with  the 
statutory  requirements.  The  filed  application  immedi- 
ately becomes  the  charter  of  the  new  corporation,  and 
the  incorporators  are  then  fully  authorized  to  perfect 

the  organization  and  proceed  with  its  bus- 
Generai        iness.     A   charter  is  special   when  a   special 

act  of  legislature  creates  the  corporation. 
It  is  general  when  it  is  formed  under  a  general  corporation 


TYPES   OF   BUSINESS   ORGANIZATIONS       41 

act  by  filing  an  application  for  charter  with  the  prescribed 
public  authority.  It  is  a  common  practice  to  put  in 
the  body  of  a  general  charter  the  important  features 
of  the  corporation  act.  The  general  corporation  laws 
of  a  state  apply  to  corporations  with  special  charter 
only  so  far  as  the  former  are  consistent  with  the  latter. 

The   work  of  incorporating  ordinary   business   cor- 
porations is  left  entirely  with  the  states.     The  federal 
government  charters  national  banks,  and  there  incorpora- 
are  instances  of  federal  charters  for  railroads  ^^^  ®**^®' 

state  or 

doing  interstate  business.     It  is  possible  for  federal, 
the  federal  government  to  grant  charters  for  other  under- 
takings.    A  federal  incorporation  act  would  be  very 
advantageous  in  making  uniform  the  requirements  for 
incorporation,  which  differ  in  detail  in  the  various  states. 
Some  charters  are  brief,  while  others  contain  a  mass 
of  details.     Charters,  nevertheless,  must  contain  many 
essential  facts.    The  name  must  be  given  and  charter 
considerable  freedom  is  allowed  in  the  choice  essentials, 
of  a  corporation  name.     The  chief  restriction  is  the  for- 

biddiner  of  the  choice  of  a  name  like  or  nearly 

iM        1  ^  .  ,        ,  .1.  Name. 

like  that  of  a  corporation  already  transactmg 

business  in  the  state.     Some  states  compel  the  corporate 

name  to  begin  with  ^'  The  "  and  end  with  "  Company,*'  while 

in  others,  the  name  must  be  followed  by  ^'Lim-  „   ^     ,. 

'  ''  II.   Location 

ited    or  *  *  Incorporated. ' '     The  location  of  the  of  principal 
principal  office  of  the  corporation  must  be  ^  ^®* 
stated.     This  does  not  mean  the  chief  operating  office 
which  may  be  in  another  state.    The  purposes   in.  Fur- 
or objects  of  the  corporation  must  be  clearly  ?ects^7in?' 
and  definitely  stated.     Ordinary  business  cor-  corporation. 


42  ECONOMICS   OF  BUSINESS 

porations  have  the  greatest  freedom  in  their  choice  of  busi- 
ness ventures ;  the  only  restriction  is  the  prohibition  of 
undertaking  those  enterprises  which  are  allowed  to  be  con- 
ducted only  by  corporations  fulfilling  special  legal  require- 
ments. As  the  corporation  can  engage  only  in  those 
business  activities  mentioned  in  its  charter,  the  purpose 
clause  should  be  broad  enough  to  include  all  enterprises 
that  the  corporation  may  wish  to  conduct  during  any 
future  time.  The  object  clause  in  the  charter  of  the 
United  States  Steel  Corporation  contains  eleven  para- 
graphs, each  of  which  is  a  grant  of  extensive  powers  in 
itself.  For  fear  that  some  future  activities  might 'be 
prohibited  on  account  of  lack  of  authority,  the  follow- 
ing is  a  part  of  the  last  paragraph : 

"  to  do  anything  and  all  other  acts  and  things,  and  to  exer- 
cise any  and  all  other  powers  which  a  copartnership  or  any 
natural  person  could  do  and  exercise,  and  which  now  or  here- 
after may  be  authorized  by  law." 

The  amount  of  capital  stock  must  be  given  and  can 
be  changed  only  by  an  amendment  of  the  charter. 
IV.  Amount  Many  states  have  no  limitation  upon  the 
of  capital.  amount,  but  some  have  a  minimum,  and 
a  few  a  maximmn.  If  the  capital  stock  is  of  differ- 
ent kinds,  not  only  must  the  classes  into  which  it  is 
divided  be  clearly  defined,  but  the  rights  and  privi- 
leges enjoyed  by  each.  The  number  of  shares  into 
which  the  capital  stock  is  divided  must  be  stated,  as 
v.  Number    ^cll  as  the  par  value  of  each  share.     Some 

of  shares  of  ,  .    .  im.ii 

stock.  states  have  a  mmimum,  while  others  have  a 

maximimi  Hmitation  upon  par  value.  For  a  business 
corporation  the  usual  par  value  is  one  hundred  dollars. 


TYPES   OF  BUSINESS   ORGANIZATIONS  .    43 

Mining  companies  frequently  issue  shares  as  low  as  one 
dollar  and  shares  with  a  par  value  of  ten  dollars  are  very 
common. 

It  is  customary  to  state  the  duration  of  a  charter, 
or  the  term  for  which  a  corporation  is  formed.     Some 
states  permit  corporations  to  be  incorporated  in  yj  j^^^, 
perpetuity.     Others  fix  a  maximum  of  twenty  tion  of 
or  fifty  years.     In  the  majority  of  states,  while 
a  corporation  may  be  Hmited  in  its  charter  to  any  period, 
it  is   permitted  to  express  its  duration  as  perpetual. 
When  the  time  specified  in  the  charter  or  ^^^  ^^^  ^ 
fixed  by  law  expires,  the  corporation  comes  and  post- 
to  an  end  and  its  charter  must  be  renewed  ad^esses 
or  extended,  or  its  business  must  be  closed,  o^*^- 

corpo- 

A  charter  must  contain  the  names  and  post-  rators. 
office  addresses  of  the  incorporators. 

Incorporators  or  parties  applying  for  a  charter  must 
be  persons  legally  competent  to  make  a  contract,  and  a 
certain  number  must  be  citizens  of  the  state  incorpo- 
where  the  charter  is  to  be  granted.     Minors,  '**°'^- 
partnerships  and  corporations  cannot  be  incorporators, 
yet  may  hold  stock  after  a  corporation  comes  into  exist- 
ence.    The   minimum   number    of    incorpo-   Quaiifica- 
rators  is  in  most  states  three,  but  some  have  **°°- 
five.     Each  incorporator  must  ordinarily  subscribe  for 
one  or  more  shares  of  stock. 

A  corporation  is  domestic  in  the  state  where  it  ob- 
tains its  charter.     In  all  other  states  it  is  foreign,  and 
in   foreign   countries,   ahen.     The   admission  Domestic 
of  a  foreign  corporation  into  a  state  for  the  corporation, 
transaction  of  intra-state  business  is  a  matter  entirely 


44  ECONOMICS  OF  BUSINESS 

within  the  state's  discretion.  A  state  may  entirely 
Foreign  exclude  a  foreign  corporation  or  restrict  its  busi- 
corporation.  j^^gg  ^q  ^  particular  locality,  or  exact  security 
for  the  privilege  of  trading  with  its  citizens,  but  a  state 
cannot  interfere  with  the  inter-state  commerce  of  a  for- 
its  reguia-  ^ign  Corporation.  A  foreign  corporation  has 
^°^*  no  rights  except  through  courtesy  or  such  as 

may  be  granted  by  the  legislatures  of  the  states.  It 
must  strictly  comply  with  the  terms  or  conditions  im- 
posed. All  states  have  passed  laws  differing  in  detail, 
but  generally  providing  that  a  foreign  corporation  can- 
not enter  and  do  business  without  first  obtaining  a 
Ucense.  A  foreign  corporation  is  usually  required  to 
keep  a  local  office  with  an  authorized  agent  in  charge, 
upon  whom  legal  papers  may  be  served.  Frequently, 
a  copy  of  the  charter  must  be  filed  with  the  proper  state 
official.  Some  states  demand  the  payment  of  fees 
based  usually  upon  the  amount  of  capital  which  the  cor- 
poration employs  in  the  state. 

Incorporation  gives  to  a  corporate  body  all  powers 
properly  specified  in  the  charter  or  expressly  stated  in 
Powers  of  ^^^  Statutes  of  the  state  where  the  charter  is 
corporation,  obtained.  Besides  this,  other  powers,  called 
*p^®ss®  •  general  or  impHed,  are  conferred  simply  by  the 
act  of  incorporation,  and  are  enjoyed  by  all  corporations. 
Implied   powers   are   those   which   naturally 

Implied. 

arise  from  the  nature  of  the  business.  They 
are  not  limited  to  those  powers  which  are  indispensable, 
but  include  all  which  are  appropriate  and  suitable  for 
carrying  out  the  expressed  powers  of  the  charter  and 
the  statutes.     Of  the  implied  powers,  the  most  important 


TYPES   OF   BUSINESS   ORGANIZATIONS       45 

are   that   the  corporation  may  sue  and  be  sued,  incur 
debts,  enter  into  contracts,  use  a  seal,  buy,  sell  charter 
and  hold  property,  appoint  directors,  officers  ^^^J^  P®* 
and  agents,  make  by-laws,  dissolve  itself  and  pUed 
do  all  proper  things  necessary  to  carry  out  p*^^®"* 
its  business  undertakings.     Many  charters  fully  state  the 
imphed  as  well  as  the  expressed  powers,  but  the  men- 
tion of  the  former  is  unnecessary,  as  they  are  recognized 
by  law  as  incidental  to  the  carrying  out  of  the  purposes 
of  incorporation. 

There  are  certain  special  powers  that,  if  not  men- 
tioned in  the  charter,  the  corporation  does  not  possess. 
The  purpose  of  incorporation   is   a   special  special 
power  and  the  corporation  is  confined  to  the  po^®"- 
conducting  of  those  business  enterprises  mentioned  in 
its   charter.     In  most    states,   many  other  powers,   if 
specified,  are  allowed,  as  the  issue  of  various  kinds  of 
stock,  power  to  hold  stock  in  other  corporations,  lim- 
itation  upon  the   salary  paid  officers   and  restrictions 
upon  the  power  to  mortgage  the  property  of  the  cor- 
poration.   These  powers  must  be  conferred 
by  statute,  and  then,  in  order  to  be  enjoyed  by  statute 

by  a  corporation,  must  be  stated  in  the  charter,  fiid  stated 
^  ,  in  charter. 

There  are  a   few  instances   where    statutes 
have  made  special  powers  general  and  then  they  are  en- 
joyed by  all  corporations,  such  as  cumulative  voting  in 
California  and  Ilhnois. 

By-laws  are  permanent  rules  for  conducting  a  busi- 
ness  undertaking,    framed   and   adopted   by 
the  stockholders  or  their  representatives,  the     ^"  *^  ' 
directors.     A  by-law  differs  from  a  resolution  in  that  the 


46  ECONOMICS  OF  BUSINESS 

latter  applies  to  a  single  act  of  a  corporation,  whereas 
the  former  is  permanent  and  is  applied  on  all  occa- 
sions imtil  repealed.  It  is  not  only  necessary,  but  very 
Necessity  of  desirable  for  a  corporation  to  have  carefully 
by-laws.  framed  by-laws.  They  must  be  confined  to 
the  limitations  of  the  charter  and  must  conform  to  the 
corporation  laws  of  the  state.  Strictly  speaking,  the 
stockholders  alone  have  the  power  to  enact  by-laws,  but 
in  many  cases,  by  charter  provision,  or  by  vote  of  the 
stockholders  themselves,  this  power  is  delegated  to  the 
board  of  directors. 

It  is  true  that  stockholders  have  the  charter  and 
corporation  laws  of  the  state  to  guide  them,  but 
they  do  not  provide  for  any  of  the  details  of  organiza- 
tion, administration  and  business  routine  for  which  by- 
laws are  necessary.  By-laws  must  be  carefully  drawn, 
properly  adopted  and  contain  provisions  for  the  issue 
and  transfer  of  stock,  the  meetings  of  stock- 
holders and  directors,  the  election  of  direc- 
tors and  officers  and  their  respective  powers  and  duties, 
the  general  care  and  management  of  the  corporation 
property,  the  care  of  the  finances,  the  payment  of  divi- 
dends and  the  method  of  by-law  repeal  and  amendment. 
The  capital  stock  of  a  corporation  is  the  amount  of 
its  authorized  stock.  It  need  not  be  large,  because 
Capital  a  large  business  enterprise,  as  in  the  case  of 
^^^  the  Equitable  Life  Insurance  Company,  may 

be  carried  on  with  a  small  amount  of  capital  stock. 
For  the  sake  of  convenience  in  estimating  the  interests  of 
stockholders  and  in  facilitating  transfer  of  ownership, 
capital  stock  is  divided  into  equal  parts  called  shares 


TYPES   OF   BUSINESS   ORGANIZATIONS       47 

of   stock.      A  person   owning  one   or   more  shares  of 
stock  is  a  stockholder.     As  evidence  of  own-  stock- 
ership,    he   is    entitled   to    a   stock   certifi-  ^o^^®'- 
Gate.    A  certificate  signed  by   the   president   and  sec- 
retary or  president  and  treasurer  and  bearing  the  cor- 
poration seal  states   the  number  of  shares  stock  cer- 
owned  and   the   special   conditions,   if   any,  ^ficate. 
governing   the   stock  in   question.     A   share   of   stock 
gives  the  owner  a  voice  in  the  management,  an  interest 
in  the  profits  and  a  proportionate  share  in  the  ultimate 
assets  of  a   corporation.     A   stockholder   has   an   un- 
divided interest  in  the  business.     He  is  not  entitled  to 
any  particular  part,  but  owns  a  proportionate  share  in 
all  assets   combined.     Many  states  allow  with  proper 
charter  provisions  the  issuing  of  stock  without  voting 
power.     Unless  it  is  allowed  by  statute  and  provided 
for  in  the  charter,  every  owner  of  record  enjoys  the  usual 
voting  power  and  may  exercise  it  in  person  or  by  proxy. 
Four  methods  are  used  in  issuing  stock.     First,  stock 
may  be  issued  on  subscription  payable  in  cash,  j^g^ij^^jg  ^f 
This  is  the  siriiplest  and  safest  method  of  issu-  issuing 
ing  stock.     The  subscription  is  usually  made  in 
writing  and  signed,  then  the  future  payment  may  be  en- 
forced by  law.     Secondly,  stock  may  be  issued  on  sub- 
for  labor,  property,  or  any  valuable  considera-  scription. 
tion  other  than  money.     This  method  must  first  be  au- 
thorized by  statute,  and  care  should  be  taken 
that  whatever  is  given  for  stock  is  not  over- 
valued.    Thirdly,  stock  may  be  issued  as  a  stock  dividend. 
A  certain  amount  of  stock  is  declared  by  the  stock 
directors  as  a  free  gift  to  the  holders  of  the  d^^dend. 


48  ECONOMICS  OF  BUSINESS 

stock.  This  is  possible  only  when  the  whole  amount 
of  capital  stock  is  not  issued,  or  when  it  is  in- 
creased. In  every  case,  the  increased  issue  should  be 
supported  by  the  proper  earning  power.  This  practice 
is  prohibited  by  statute  in  some  states.    Lastly,  it  is  a 

_  common    practice    with   industrial    corpora- 

Common         .  .^  ^ 

stock:  a  tions  to  issue  common  and  preferred  stock 
and  to  give  a  certain  percentage  of  the  com- 
mon as  a  bonus  to  the  original  buyers  of  the  preferred. 
There  are  many  instances,  especially  in  the  case  of  rail- 
roads and  in  some  public  service  corporations,  where 
all  or  part  of  the  stock  issued  is  given  as  a  bonus  to 
the  original  bondholders. 

Capital  stock  is  divided  into  two  general  classes, 
preferred  and  common,  although  many  corporations 
Preferred  issue  only  the  latter.  Preferred  stock  is  that 
stock.  which  is   granted   certain   specific   privileges 

by  a  corporation.  It  is  usually  secured  by  special 
provisions  in  the  charter,  but  some  states  allow  it  by 
by-law  provision.  The  preference  usually  consists  in 
Cumuia-  giving  a  dividend  on  the  preferred  stock  before 
tive.  any  payment  is  made  on  the  common.    The 

dividend  may  be  either  cumulative  or  non-cumulative. 
Dividends  on  cumulative  preferred  stock,  if  not  paid  in 
full  each  year,  accumulate  from  year  to  year  and  must  be 
paid  before  any  payment  is  made  on  the  common  stock. 
Non-cumu-  Non-cumulative  preferred  stock  is  where  the 
lative.  profits,  Usually  including  those  accumulated 

from  the  past,  are  insufficient  to  pay  the  preferred  stock 
dividends ;  the  unpaid  part  is  lost,  it  matters  not  how 
great  the  profits  are  for  the  years  following.     Stock 


TYPES  OF  BUSINESS  ORGANIZATIONS       49 

may  be  preferred  as  to  assets,  as  well  as  dividends,  or 
both.  There  may  be  grades  of  preferred,  as  first  pre- 
ferred, second  preferred,  third,  etc.  If  profits  after 
payment  of  the  preferred  dividends,  warrant  Distribution 
other  dividends,  various  methods  are  in  prac-  ^^  profits, 
tice  for  their  distribution.  First,  the  preferred  may 
share  equally  with  the  common  as  to  further  dividends. 
Secondly,  the  common  may  receive  equal  dividends; 
if  the  profits  warrant  further  distribution,  each  share 
alike.  Thirdly,  the  preferred  may  receive  a  fixed  dividend 
and  the  common  a  fixed  dividend ;  further  distribu- 
tion, all  go  to  the  preferred.  Lastly,  the  customary 
arrangement  is  for  the  preferred  to  get  a  fixed  dividend 
and  no  more  and  all  extra  profits  to  go  to  the  common 
stock. 

Common  stock  is  that  which  does  not  possess  any 
special  privileges  or  restrictions.  If  privileges  are 
granted,  or  restrictions  placed  on  a  portion  of  common 
the  stock,  such  is  no  longer  common  stock,  ^*°^^* 
and  only  what  remains  is  so  classed.  In  many  corpora- 
tions, all  of  the  stock  is  common  and  each  share  possesses 
equal  rights  in  the  earnings  and  assets.  The  ordinary 
practice  in  industrials  is  to  have  preferred  and  common, 
the  preferred  representing  the  tangible  assets  and  the 
common  the  intangible,  as  trade-marks,  good  will, 
patent,  franchises,  and  economies  resulting  from  produc- 
ing on  a  large  scale. 


50  ECONOMICS  OF  BUSINESS 

QUESTIONS 

1.  What  are  the  chief  objections  to  single  entrepreneurship 
as  a  form  of  business  enterprise  ? 

2.  Why  is  the  joint  stock  company  not  a  favorite  type  of 
business  organization  ? 

3.  What  essential  facts  should  the  articles  of  copartner- 
ship contain  ? 

4.  What  is  meant  by  saying  that  a  corporation  is  a  separate 
entity  ? 

5.  State  and  explain  the  advantages  and  disadvantages  of 
partnerships  and  corporations. 

6.  Name  the  different  kinds  of  stock  corporations,  and 
give  the  characteristics  of  each. 

7.  What  is  the  difference  between  (o)  partnership  and  cor- 
poration, (b)  public  and  private  corporations,  (c)  non- 
stock and  stock  corporations,  (d)  domestic  and  foreign  cor- 
porations ? 

8.  Why  has  the  corporation  become  the  popular  type  of 
business  organization  ? 

9.  What  are  the  different  forms  of  business  liability  ? 

10.  What  is  a  charter  and  how  is  it  granted  ? 

11.  What  essential  facts  should  a  charter  contain? 

12.  What  are  the  limitations  placed  upon  a  foreign  cor- 
poration doing  business  in  a  state  ? 

13.  Name  and  explain  the  powers  of  a  corporation. 

14.  What  should  the  by-laws  contain  ? 

15.  What  is  preferred  stock?  What  is  the  difference  be- 
tween cumulative  and  non-cumulative  preferred  stock  ? 


TYPES  OF  BUSINESS   ORGANIZATIONS       51 

REFERENCES 

W.  H.  Lough,  Jr.,  "Corporation  Finance" ;  W.  A.  Wood, 
"Modern  Business  Corporations";  H.  R.  Seager,  "In- 
troduction to  Economics,"  Ch.  VIII;  R.  J.  Frank, 
"  Science  of  Organization  and  Business  Development " ;  J.  J. 
Sullivan,  "American  Corporations";  T.  Conyngton,  "Cor- 
porate Organization,"  Chs.  XII,  XIII,  XIV;  Burch  and 
Nearing,  "Elements  of  Economics,"  Chs.  X,  XII;  Nearing 
and  Watson,  "  Economics,"  Ch.  XXXV ;  "  Business  Adminis- 
tration," edited  by  W.  D.  Moody,  Vol.  X,  Ch.  XIII; 
J.J.  Sullivan,  "American  Business  Law,"  Part  II ;  T.  Conyng- 
ton, "  Corporate  Management,"  Chs.  I,  II,  III. 


CHAPTER  III 

INTERIOR  ORGANIZATION 

The  management  of  a  business  corporation  is  in  the 
hands  of  a  board  of  directors  elected  annually  by  the 
Board  of  Stockholders  from  their  own  number.  The 
directors.  details  of  management  are  usually  assigned 
to  officers  chosen  by  the  directors.  The  directors  are 
the  agents  of  a  corporation  and  as  such  are  responsible 
for  the  corporate  care  of  its  property,  and  for  its  proper 
management.  If  the  annual  meeting  of  stockholders 
Directors :  is  not  held,  or  if  the  election  of  directors  does 
a^oM^ra-  ^^^  ^^^^  place,  the  old  board  remains  with 
tion.  all  its  powers   until   successors   are   elected. 

Many  states  fix  the  minimum  number  of  the  board 
at  three,  others  at  five  members,  but  usually  there  is  no 
maximum  limit. 

Directors,  acting  as  agents  of  a  corporation,  must  man- 
age it  as  carefully  as  a  business  man  conducts  his  busi- 
~  ness.  They  are  held  liable  for  acts  which 
themselves  are  wrong  or  fraudulent,  such  as 
causing  loss  to  a  company  through  neglect  or  wrongdoing 
on  their  part,  issuing  stock  as  fully  paid  when  it  is  not, 
allowing  dividends  to  be  paid  out  of  capital,  or  perform- 
ing any  act  forbidden  by  the  statutes  of  a  state.  In 
addition  to  these  liabilities,  special  laws  have  been  passed 
by  many  states  making  directors  liable  criminally  as  well 

52 


INTERIOR  ORGANIZATION  53 

as  civilly  for  certain  acts,  as  making  false  reports,  loans 
to  stockholders  out  of  funds  of  the  corporation,  etc. 
But  so  long  as  directors  keep  within  the  law  and  ex- 
ercise care  in  management,  no  liability  attaches  to  them 
in  the  discharge  of  their  duties. 

The  by-laws  fix  the  number  of  directors,  their  qualifi- 
cations, method  of  election,  term  of  office,  method  of 
filling  vacancies,  meetings,  and  compensation  for  serv- 
ices. For  the  average  corporation,  a  small  board  is 
more  efficient  than  a  large  one.  States  usually  require 
directors  to  be  stockholders,  and  at  least  one  Quaiifica- 
or  more  resident  of  the  state  of  incorporation.  **°°^' 
In  such  cases,  when  a  director  ceases  to  be  a  stockholder, 
he  vacates  his  office.  Some  states  allow  the  stock- 
owning  requirement  to  be  set  aside  by  provision  in  the 
charter  or  by-laws.  As  to  other  requirements,  the 
general  rule  is  that  a  person  legally  qualified  to  make  a 
contract  may  be  elected  a  director. 

When  once  elected,  a  director  unless  he  is  disqualified 
by  his  acts,  is  entitled  to  hold  office  until  the  expiration 
of  his  term,  and  cannot  be  removed  by  stockholders, 
directors,  or  court.  An  exception  is  made  in  one  or  two 
states,  where  stockholders  have  the  power  to  Dijgj.tQ„ 
remove  directors  at  any  time.  A  single  direc-  must  act  as 
tor  has  no  power  to  contract  or  do  business  for  ^  °  ^' 
the  corporation.  Directors  can  contract  and  act  only  as 
a  board  duly  notified  and  assembled*  A  majority  must 
be  present,  and  a  majority  of  that  majority  acts  and 
binds  a  corporation.  A  board  of  directors  may  delegate 
to  an  agent  power  to  make  a  contract  or  do  business, 
and  this  agent  may  be  a  director  or  a  third  party.    The 


54  ECONOMICS  OF  BUSINESS 

board  of  directors  has  supreme  power  in  management, 
and  all  acts  and  contracts  which  the  corporation  enters 
into  must  be  by  or  through  it. 

Sometimes,  one  or  two  men  wish  to  get  control  of  a 
board  of  directors,  which  they  do,  through  the  creation 
Dummy  oi  dummy  directors.  A  dummy  director  is  one 
director.  ^j^q  follows  the  bidding  of  some  other  person, 
or  votes  as  he  is  told.  He  may  be  a  stockholder,  and 
outside  interests  are  depended  upon  to  make  him  vote 
as  desired,  or  he  may  be  an  outsider  and  one 

Purpose. 

or  more  shares  of  stock  are  given  him  so  that 
he  qualifies  for  office.  In  the  latter  case,  if  any  doubt 
How  con-  exists  about  his  voting,  he  is  compelled  to  re- 
troUed.  ^^.j^  ^q  ^jjg  (^onor  the  indorsed  stock  certificate, 
which  represents  the  stock  which  has  been  given  or  trans- 
ferred to  his  name.  Any  time  he  fails  to  obey  brders, 
the  actual  owner  has  the  stock  transferred  again  to  his 
own  name,  and  the  director,  not  being  qualified,  loses  his 
office.  A  stockholder  who  controls  a  majority  of  shares 
may  through  dummy  directors  direct  and  control  a  cor- 
poration and  yet  not  be  a  director. 

Under  the  ordinary  system  of  voting,  parties  control- 
ling 51  per  cent  of  stock  elect  the  board  of  directors. 
The  minority  interests,  not  having  a  representative  on 
the  board,  very  frequently  have  their  rights  imposed 
upon,  and  have  just  ground  for  complaint.  To  give  the 
minority  interests  protection,  and  make  it  possible,  if 
Cumulative  their  holdings  are  of  any  size,  to  elect  one  or 
voting.  more  representatives  on  the  board,  a  cumu- 

lative system  of  voting  was  introduced.  Under  the 
ordinary  system,  if  a  stockholder  owns  ten  shares  of 


INTERIOR  ORGANIZATION  55 

stock  and  there  are  ten  directors  to  be  elected,  he  casts 

ten  votes  for  each  director,  and  if  all  his  votes  are  to 

be  cast,  he  is  forced  to  give  ten  to  each  of  the  ten 

candidates.     Under    the   cumulative  system,  q^^^^^ 

each  share  has  a  vote  for  each  director,  but  the  system  vs. 

stockholder  may  vote  for  each  or  cast  all  his  ^"™^ 

votes  for  one.    If  a  stockholder  has  ten  votes,  and  there  are 

ten  directors  to  be  elected,  he  may  cast  his  hundred  votes 

for  one  director,  or  distribute  them  among  the  ten. 

With  any  showing  of  strength,  the  minority  very  seldom 

fails  to  elect  one  or  more  of  their  number  and 

Advantage, 
instances  are  known  where  the  majority,  by 

scattering  their  votes,  lost  entire  control  of  a  board. 
Cumulative  voting  is  used  only  in  the  election  of  direc- 
tors. It  is  allowed  in  a  large  majority  of  states,  and 
some  have  gone  so  far  as  to  compel  its  use,  declaring  it 
to  be  the  only  proper  system  for  the  election  of  di- 
rectors. 

The  individual  stockholder  has  few  rights  and  few 
duties  to  perform.    He  receives  notice  of,  and  has  a  right 
to  attend  all  stockholders'  meetings  in  person  p 
or  by  proxy,  and  to  cast  votes  for  his  stock.  stock- 
Stockholders  assembled  together  in  corporate 
meetings  have  power  to  elect  directors,  make  by-laws,  un- 
less this  power  is  delegated  to  directors,  provide  for  increase 
or  decrease  in  capital  stock,  authorize  amendment  to  char- 
ter, give  their  assent  in  certain  states  to  the  sale  or  mort- 
gaging of  the  company's  property,  and  sanction  the  dis- 
solution of  the  corporation.     The  board  of  directors  for 
whom  a  majority  of  votes  is  cast  at  the  annual  meeting 
has  active   control   of   an  enterprise   and  the    stock- 


$6  ECONOMICS  OF  BUSINESS 

holders  have  little  to  do  until  the  next  annual  meeting. 
A  stockholder  has  the  right  to  inspect  the  accounts 
of  a  corporation,  but  the  courts  and  the  legislatures  have 
placed  various  restrictions  upon  this  right. 

The  chief  officers  of  a  corporation  are  the  president, 
secretary,  and  treasurer.  Two  of  the  offices  may  be 
Q^  held  by  the  same  person.     In  large  corpora- 

a  corpora-  tions,  the  number  is  increased  by  one  or  more 
vice-presidents,  assistant  secretaries,  assistant 
treasurers,  a  general  manager,  auditor,  general  counsel, 
and  a  chairman  of  the  board  of  directors.  The  chair- 
man and  the  president  are  always  members  of  the  board, 
but  the  others  may  or  may  not  be  directors.  The  officers 
are  usually  chosen  by  the  board,  but  a  few  states  permit 
them  to  be  elected  by  the  stockholders.  The  by-laws 
usually  name  the  different  officers,  their  mode  of  ap- 
pointment, and  clearly  define  the  duties  of  each. 

Some  large  corporations  have  a  chairman  of  the  board 
of  directors,  who  presides  at  all  their  meetings. 

Chairman  , 

of  board  of     He  is  usually  a  former  president  and  contmues 
directors.       ^^  perform  a  few  of  his  old  duties.    The  chief 
executive  is  the  president.    He  presides  at  all  meetings 
of  stockholders,  and,  if  there  is  not  a  chairman 
of  the  board,  at  meetings  of  directors.     His 
office  alone  does  not  give  him  any  power  to  buy,  sell,  or 
contract  for  the  corporation,  nor  control  its  private  funds 
or  management.     What  power  he  possesses  must  be 
specified  by  the  by-laws  or  resolutions  of  the 
board.     The  board  usually  authorizes  him  to 
sign  all  stock  certificates,  deeds,  and  other  important  in- 
struments.    The  president  binds  a  corporation  by  his 


INTERIOR  ORGANIZATION  57 

acts  or  contracts  when  he  is  expressly  authorized  to  act 
or  contract,  when  he  is  permitted  by  a  corpora- 
tion for  some  time  to  act  or  contract  for 
it,  and  when  a  corporation  ratifies  or  accepts  the  benefits 
of  a  contract  after  it  is  made.  He  makes  an  annual  re- 
port to  the  board  and  presents  the  same  at  the  annual 
meeting  of  the  stockholders. 

A  vice-president  is  often  appointed  to  assist  the  presi- 
dent in  the  performance  of  his  duties.    He  takes  the 
place  of  the  president  in  case  of  his  absence,  vice- 
disability,  or  refusal  to  act.    The  office  of  vice-  President, 
president  does  not  in  itself  carry  any  powers.     The  duties 
and  powers  must  be  clearly  specified  and  au- 
thorized  by  by-laws  or  resolutions  of  the  board. 
If  a  corporation's  business  requires  it,  more  than  one 
vice-president  may  be  appointed.     Certain  ex- 
ecutive duties  are  assigned  to  each,  and,  in  the 
absence  of   the  president,  they  in  order  of  precedence 
perform  his  duties. 

The  secretary  is  an  important  officer  of  a  corporation, 

and  many  states  by  statute  require  the  appoint- 

Secret&ry. 
ment  of  such  an  official,  and  specify  his  more 

important  duties.  Among  his  many  and  varied  duties 
may  be  mentioned  the  following:  He  must 
keep  the  minutes  of  the  meetings  of  the  board 
of  directors  and  the  stockholders,  serve  all  notices  for 
the  corporation,  sign  and  countersign  all  contracts  au- 
thorized by  the  board  of  directors  or  finance  committee 
and  affix  thereto  the  corporate  seal,  keep  a  record  of  stock 
and  stockholders,  and  keep  all  instruments  and  records 
that  are  not  assigned  to  other  officials.    He  is  a  mere 


58  ECONOMICS  OF  BUSINESS 

servant  and  has  to  do  as  he  is  told.  He  has  no  author- 
ity to  represent  the  corporation,  but  the  board  may  ex- 
pressly authorize  him  to  contract  for  it,  and  may  accept 
or  ratify  his  contracts  after  they  are  made.  In  large 
companies,  the  secretary  has  one  or  more  assistants, 
whose  duties  are  defined  in  the  by-laws  or  determined 
by  order  of  the  board. 

The  treasurer  is  the  custodian  of  all  funds  and  se- 
curities of  a  corporation.     It  is  customary  for  him  to 
give  a  bond  for  the  faithful  discharge  of  his 

Treasurer.  ' 

duties.  The  amount  of  the  bond,  and  the 
securities  that  will  be  accepted,  are  usually  stated  in  the 
by-laws.     The  treasurer  not  only  keeps  his  own  books, 

but  ordinarily  has  charge  of  the  bookkeeping 

Duties. 

of  the  company.  He,  like  the  secretary,  has 
no  power  to  represent  the  corporation,  and  what  powers 
he  possesses  must  be  expressly  delegated  to 
him.  He  is  usually  authorized  to  sign  all 
checks  (but  these  are  in  large  corporations  counter- 
signed by  the  president  or  some  official  assigned  for 
the  purpose)  and  indorse  all  negotiable  instruments. 
Like  the  secretary,  he  may  have  one  or  more  assistant 
treasurers,  to  assist  him  in  his  work. 

The  president  in  a  small  corporation  is  usually  delegated 
all  managerial  powers,  and  personally  directs  and  super- 
General  vises  the  business  enterprise.  In  large  cor- 
manager.  porations,  the  managerial  duties  are  so  nu- 
merous and  important,  that  it  is  the  custom  to  appoint 
a  general  manager  to  assist  in  these.  The 
by-laws  usually  provide  for  this  official,  as 
well  as  define  his  powers,  duties,  term  of  office,  and 


INTERIOR  ORGANIZATION  59 

compensation,   but  if   such  is  not  done,    the  board  of 
directors  possesses  the  power  to  do  so. 

With  the  increase  in  the  size  of  the  business  unit  and 
the  growing  complexity  of  business  organization,   the 
problem  of  the  systematic  keeping  of  accoimts  j^^^^^j. 
is  an  important  one.     It  introduced  in  the 
industrial  field  a  new  official,   the   auditor.     To-day, 
with  our  large  business  undertakings,  this  official  is 
indispensable,  and   an  absolute  necessity.     His  duties 
are  to  supervise  and  take  charge  of  the  whole        . 
system  of  corporation  accounts,  and  he  fre- 
quently has  under  him  a  large  clerical  force.    As  in  the 
case  of  the  general  manager,   if  the  by-laws  do  not 
provide  for  the  office,  the  board  of  directors  may  do  so. 

The  counsel  is  the  legal  adviser  of  a  corporation. 
He  has  no  authority  to  act  except  as  expressly 
given  in  the  by-laws  or  by  the  board  of  direc- 
tors. His  duties  consist  in  giving  legal  advice  whenever 
necessary,  drawing  all  contracts  and  impor- 
tant  instruments,  and  representing  the  com- 
pany in  case  of  litigation. 

Dividends  are  profits  declared  and  ordered  by  the 
directors  to  be  paid  to  shareholders  on  demand  at  a 
fixed   time.     The   directors   alone   have   the  Dividends, 
power  to  declare  dividends  from  the  earnings  of  a  cor- 
poration and  fix  the  amount,  time,  and  manner  of  pay- 
ment.   Until  a  dividend   is  declared,  profits  stock- 
belong  to  the  corporation  and  are  Hable  for  5°^"*^° 
corporation  indebtedness.     Stockholders  have  right  to 
no  definite  rights,  but  only  potential  rights,  p^°^*^* 
to  share  in  the  net  profits  of  a  corporation  according 


6o  ECONOMICS  OF  BUSINESS 

to  their  respective  interests,  but  where  the  stockholders 
are  notified  that  a  dividend  has  been  declared,  an  amount 
sufficient  to  pay  it  is,  in  the  eyes  of  the  law,  separated 
from  the  assets  and  held  by  the  company  in  trust  for 
the  stockholders.  When  dividends  have  been  properly 
declared  out  of  the  net  profits  and  time  comes  for  pay- 
ment, there  is  a  debt  due  by  the  corporation  to  the 
stockholders  and, can  be  collected  by  due  process  of 
law.  U 

The  directors  determine  whether  or  not  a  dividend  is 
to  be  declared.  When  they  refuse  to  do  so,  the  stock- 
Granting  holders  must  prove  to  a  court  of  equity,  that 
of  dividends,  there  is  a  clear  abuse  of  power  before  it  will  in- 
terfere, and  compel  the  directors  to  declare  and  pay  a 
dividend.  The  directors  may  in  fair  exercise  of  their 
discretion  invest  profits  to  extend  and  develop  a  busi- 
ness. They  may  set  profits  aside  to  pay  indebtedness, 
that  is  not  due  until  some  time  in  the  future.  Dividends 
must  be  paid  out  of  net  earnings.  If  all  stockholders 
assent,  it  is  legal  to  distribute  part  or  even  all  of  the 
profits  in  salaries. 

Capital  is  a  very  important  factor  in  all  business  enter- 
prises. Without  large  amounts  of  it,  the  business  world 
would  be  severely  handicapped.    The  ability 

A  corpora-  ,.     .      ,  ^  •     i  <•       • 

tion  draws  to  get  an  unhmited  amount  of  capital  for  m- 
fro^^  vestment  has  made  the  United  States  the 
classes  of  greatest  industrial  country  in  the  world.  A 
peop  e.  corporation  possesses  the  advantage  of  being 

able  to  draw  its  funds  through  the  sale  of  stocks  and 
bonds  from  all  classes  of  people.  A  share  of  stock  rep- 
resents a  proportionate  part  of  assets,  while  a  bond 


INTERIOR  ORGANIZATION  6i 

<f  ^ 
is  a  lin^iji  interest  in  a  corporation.    A  stockholder 

is  a  par^^er  of  a  corporation,  but  a  bond- 
holder is  a  secured  creditor.     Stockholders,        vs. 
or  their  representatives,  the  directors,  have     °°    ^^ 
absolute  control  of  a  business  enterprise,  while  bond- 
holders, as  long  as  they  are  paid  their  interest  and 
principal  at  maturity,  have  not  the   sUghtest  say  in 
the  management. 

An  ordinary  bond  is  an  interest-bearing  promise  to 
pay  a  definite  sum  of  money  on  some  date  in  the  future. 
There  are  a  great  many  varieties  of  bonds,  ^    , 
but  the  simplest,  and  the  one  ordinarily  used,  many  * 
is  the  mortgage  bond.     This  bond  is  secured  ^^®***^* 
by  a  mortgage  upon  the  real  or  personal  property  of  a 
corporation.   A  corporation  mortgage  is  similar 
to  one  made  by  an  individual.     When  a  corpo- 
ration wishes  to  raise  a  large  sum  of  money,  it  often  finds 
it  advisable  to  divide  the  whole  amount  into  parts,  and 
oflter  these  to  the  public.    This  gives  the  small  investor  an 
opportunity  to  invest  his  savings,  and  at  the  same  time 
gives  the  corporation  a  large  field  from  which  to  draw  its 
funds.     In  the  mortgage  bond,  a  mortgage  deed  of  trust 
is  usually  given  to  a  trust  company  to  secure  the  bonds 
issued  by  the  corporation.     The  trust  company  acts  as 
trustee,  collects  the  interest  and  principal  at  maturity, 
and  pays  the  same  to  the  bondholders.    If  the  corporation 
fails  to  pay  the  interest  or  principal,  the  trust  company 
takes  possession  of  the  property,  and  disposes  of  it  for 
cash  to  pay  off  the  bonds.    There  may   be 
first,  second,  third,  or  further  mortgage  bonds,  '  , 

according  to  priority  of  the  lien.     A  second  type  of  bond 


62  ECONOMICS   OF  BUSINESS 

is  income.  In  this  case,  the  interest  is  only  paid  when 
interest  charges  are  earned.  The  principal  is  usually  se- 
Convert-  cured  by  a  mortgage.  A  third  type  is  con- 
ibie.  vertible  bond,  or  where  it  is  possible  to  con- 

vert bonds  into  stock.  A  fourth  type  is  collateral  trust 
CoUaterai  bond.  A  corporation  holding  many  corporate 
*^^^'  securities  desires  to  raise  money,  but  at  the 

same  time  does  not  wish  to  mortgage  its  own  property. 
Securities,  covered  by  a  deed  of  trust,  are  placed  in  the 
hands  of  a  trustee,  and  upon  them  as  collateral  security 
a  new  issue  of  bonds  is   made,  called   collateral   trust 

_  .  bonds.     A  fifth  type  is  debenture  bond.     A 

Debenture.  it.  ,     i 

debenture  bond    is   one   not   secured    by   a 

Uen  on  any  specific  property.  In  case  of  insolvency,  a 
debenture  bondholder  is  an  ordinary  creditor  of  a  cor- 
poration. These  are  the  chief  kinds  of  bonds,  yet  with 
railroads  many  others  are  found. 

The  directors  have  a  right  to  mortgage  the  property  of 
a  corporation  unless  forbidden  by  statute  or  by-laws. 
to  ^^  ^^  customary  to  insert  in  the  by-laws,  restric- 
incur  in-  tions  upon  the  board  of  directors,  to  sell  bonds 
or  incur  debts.  Ordinarily,  a  debt  cannot  be 
incurred  beyond  a  limited  amount  unless  sanctioned  by  a 
two-thirds  majority  of  the  board  or  by  a  majority  of  the 
stockholders.  In  mortgaging  corporation  property,  the 
shareholders  should  always  give  their  assent,  and  many 
states  have  this  requirement  on  their  statute  books. 

A  bondholder  is  solely  interested  in  the  security  of 

his  principal  and  the  regular  payment  of  his 

bond-  interest.    These  fundamental  rights  are  partly 

holders.        ^^^  ^y  Statute,  and  partly  by  contract  be- 


INTERIOR    ORGANIZATION  63 

tween  stockholder  and  bondholder.  In  the  simple  mort- 
gage bond,  all  bondholders  enjoy  equal  privileges,  but  in 
a  corporation  issuing  different  kinds  of  bonds,  each  of 
which  possesses  different  rights  and  privileges,  the  rights  of 
a  bondholder  depend  upon  the  kind  of  bond  Dependent 
he  owns.  A  bondholder  has  no  privileges  ^f^^^^^^ 
as  long  as  his  interest  and  principal  are  owned, 
promptly  paid,  but  in  default  of  payment  of  both  or 
either,  he  possesses  certain  privileges  for  the  protection 
of  his  property.  He  may  sue  for  what  is  owing  him, 
force  the  trustee  to  foreclose  the  mortgage  on  the  cor- 
poration property,  or  ask  a  court  of  equity  to  appoint  a 
receiver  to  take  charge  of  the  property.  If  a  corpora- 
tion cannot  meet  its  obligations,  settlement  has  to  be 
obtained  by  action  of  law,  so  the  bondholders  usually 
ask  for  the  appointment  of  a  receiver. 

Some  define  capitalization  as  the  total  amount  of 
stock  and  bonds  issued  by  a  corporation,  but  in  its 
strictly    legal    meaning,    it    comprises    only  capitaUza- 
the  former.     People  have  had,  from  time  to  ^°^- 
time,  different  views  as  to  the  proper  basis  of  capitaliza- 
tion.    Formerly,  it  was  universally  accepted  that  the 
capitaKzation  should  not  exceed  the  amount  Basis, 
of  actual  money  invested  in  a  corporation.     Gradually, 
people  saw  the  error  of  this,  and  to-day  a  different 
basis   is   accepted   as  the  proper   one.     Capitalization 
should  not  be  greater  than  the  average  net  earnings  ex- 
tending over  a  sufficient  term  of  years  to  in-  p 
elude  unusual  gains  and  losses,  capitalized  at  capitaiiza- 
the  current  rate  of  interest.      If  the  average 
net  earnings,  for  instance,  for  ten  years  are  $300,ocx)  a  year. 


64  ECONOMICS  OF  BUSINESS 

and  the  rate  of  interest  on  investment  involving  similar 
risks  is  6  per  cent,  then  the  capitalization  of  the  corpora- 
tion should  be  a  sum  that  will  give  $300,000  at  6  per 
cent,  or  $5,000,000.  If  the  company  is  capitalized  for 
more  than  this,  it  is  overcapitalized ;  if  for  less,  under- 
capitalized. A  company  is  overcapitalized,  or  contains 
watered  stock,  when  it  has  not  the  proper  net  earn- 
Overcapi-  ing  power  for  the  full  amount  of  capital 
^wftwed"*  °'  stock.  Thus  a  company  may  be  overcapital- 
stock.  ized  at  one  time,  and  after  a  few  years  of  suc- 

cessful business  become  properly  capitalized.  The  United 
States  Steel  Corporation  was  for  years  greatly  overcapi- 
talized, but  a  long  period  of  prosperity  placed  the  stock 
on  a  proper  eaming-power  basis. 

In  the  formation  of  a  new   corporation,   the  pro- 
moter   should    be   very   conservative    in    fixing    the 
amount  of  capital  stock.    In  estimating  the 
me^sto       probable  net   earning  power,   the  promoter 
obtain  should,  if  the  corporation  be  a  new  venture, 

basis  for  _     ,     ,  .  - 

new  capital-  find  the  average  net  earmngs  of  a  corporation 
ization.  ^^  ^^  nature,  or  if  it  be  a  combination,  find 
the  total  average  net  earnings  of  the  different  companies 
combining,  and  to  this  sum  add  the  estimated  in- 
creased earning  power  coming  from  whatever  increased 
advantages  the  new  corporation  possesses.  This  amount 
should  be  capitalized  at  the  rate  current  for  similar  risks 
and  form  a  basis  for  the  new  capitalization.  Promoters 
are  always  prone  to  inflate  their  figures,  and  as  a  result, 
the  large  majority  of  new  corporations  are  overcapital- 
ized. 
The  great  increase  of  capital,  and  the  development 


INTERIOR  ORGANIZATION  65 

of  the  corporation  type  of  organization,  has  made  the 
promoting  of  new  enterprises,  an  important  and  profitable 
form  of  business.     The  man  who    organizes 

,  .  .        .         ,,    ,         Promoter. 

a  new  enterprise  and  sets  it  going  is  called  a 
promoter.  The  enterprise  may  be  any  type  of  organiza- 
tion, but  as  the  corporation  offers  the  greatest  oppor- 
tunities, promotion  is  chiefly  confined  to  it.  The  task 
of  a  promoter  is  by  no  means  an  easy  one.  His 
work,  beginning  with  the  possession  of  an  idea, 
and  extending  to  the  establishment  of  an  undertaking, 
equipped  and  ready  for  business,  requires  a  lot  of  physi- 
cal effort,  the  expenditure  of  large  sums  of  money,  and 
the  exercise  of  many  kinds  of  ability.  A  promoter,  in  the 
launching  of  a  new  enterprise,  has  three  separate  tasks 
to  perform.  He  must  discover  the  business  oppor- 
tunity, assemble  it,  and  raise  the  money  ^jsg^^gy 
required  for  its  establishment.  The  dis-  business 
covery  of  a  business  opportunity  is  far  more  ^^^  "^  ^* 
than  merely  finding  it.  It  means  the  most  searching  in- 
vestigation into  every  phase  of  an  opportunity  and  care- 
ful consideration  of  all  conditions  that  might  arise  in  its 
development.  Hundreds  of  business  opportunities  at 
first  sight  seem  excellent,  but  careful  investigation  proves 
that  they  are  not  worth  further  consideration.  The 
task  of  deciding,  what  opportunities  will  ultimately  prove 
successful,  is  one  of  the  most  important  functions  of  the 
promoter.  It  may  be  necessary  to  have  the  services 
of  a  score  of  specialists  in  different  lines,  and  the  inves- 
tigation may  cover  several  months. 

If  a  promoter,  after  thorough  investigation,  is  sat- 
isfied that  a  proposition  is  worth  development,  he  pro- 


66  ECONOMICS  OF  BUSINESS 

ceeds  to  get  temporary  control  of  it.  This  is  called 
Assemble  assembling  the  proposition.  If  the  proposition 
the  propo-  is  the  improvement  of  a  piece  of  real  estate, 
the  promoter  gets  an  option  on  the  land.  If 
it  is  the  development  of  an  invention,  he  gets  an  option 
on  the  invention,  or  makes  an  agreement  with  the  in- 
ventor on  a  royalty  basis.  If  it  is  the  consoUdation  of 
many  industrial  plants,  he  gets  an  option  on  each  plant. 
But,  in  the  latter  case,  it  is  sometimes  necessary  to  make 
an  agreement  with  the  owners  of  the  different  classes 
of  securities  involved.  Unless,  a  promoter  can  get 
control  of  his  proposition,  either  through  sale  or  agree- 
ment, it  is  folly  for  him  to  proceed  with  its  development. 
Suppose,  that  a  promoter  has  succeeded  in  assem- 
bling his  proposition,  he  must  now  obtain  the  money 
Finance  the  necessary  to  take  up  his  option,  develop  his 
proposition,  proposition,  and  start  his  business  imder- 
taking.  A  company  is  incorporated  with  a  certain 
capitaHzation,  the  amount  of  which  depends  upon  its 
size  and  the  expectations  of  the  promoter.  Stock  must 
be  sold  and  funds  raised.  In  doing  so,  a  promoter 
may  adopt  one  or  both  of  two  methods.  The  stock  may 
M  th  ds  ^^  extensively  advertised,  and  sold  through 
of  raising  agents  or  otherwise  to  the  investing  public,  or 
°^°°®^*  a  banker  may  be  sought  who  will  buy  a  certain 
amount  of  the  stock  at  a  fixed  price.  If  the  latter  method 
is  used,  the  banker  is  called  an  underwriter,  and  ex- 
pects to  dispose  of  the  stock  to  the  investing  public 
at  a  profit.  With  the  estabHshment  of  the  enter- 
prise, the  work  of  a  promoter  ends,  and  the  stock- 
holders take  over  the  management. 


INTERIOR  ORGANIZATION  67 

The  greatest  activities  of  promoters  have  been  in  the 
organization  of  industrial  enterprises.     It  is  customary 
in  industrial  corporations  to  issue  both  com-  Promoter's 
mon  and  preferred  stock.     A  promoter  is  usu-  P*y- 
ally  paid  in  common  stock,  though  other  methods  of 
payment  are  found.     In  the  promotion  of  the  American 
Smelting  and  Refining  Company,   the  subscribers  re- 
ceived for  each  hundred  dollars  paid  in  cash,  one  hundred 
dollars  in  preferred  stock  and  seventy  dollars  in  common 
stock,  while  the  promoters  were  given  the  remaining 
thirty  dollars  in  common  stock,  out  of  which  ^suau 
to  pay  all  expenses  of  organization  and  reward  in  common 
themselves  for  their  work.     This  is  a  liberal 
remuneration,  as  usually,  the  amount  of  common  stock 
received  is  not  more  than   10  per  cent.     Rarely,  is  a 
promoter  paid  in  money.     Sometimes,  as  in  the  case  of 
Judge  W.  H.  Moore,  in  the  organization  of  the  American 
Tin  Plate  Company,  the  promoter  buys  for  cash  all 
combining  plants,  organizes  a  company  with  a  certain 
capitalization,  disposes  of  the  stock  to  the  best  possible 
advantage,  receiving  the  difference  between  what  he 
paid  and  what  he  received,  in  payment  for  his  services. 

A  holding  company  is,  as  the  name  implies,  organized 
for  the  purpose  of  holding  stock  and  sometimes  other 
securities  in  corporations.     The  purpose  is  to  Holding 
secure  control  of  the  majority  of  the  stock  of  ^°^^^'^' 
certain  corporations,  so  as  to  elect  the  different  boards 
of  directors,  and  thereby  control  the  manage- 
ment.    The  stock  of  the  constituent   com- 
panies may  be  obtained  by  exchange  for  that  of  the 
holding  company,  or  shares  of  the  latter  may  be  sold 


68  ECONOMICS  OF  BUSINESS 

and  the  money  used  to  purchase  stock  in  the  former. 
The  holding  company  is  the  instrument  used  in  forming 
many  of  our  large  industrial  and  railroad  combinations. 
The  holding  of  stock  in  one  company  by  another  is 
not  permissible  according  to  the  general  principles  of 
Right  must  corporation  law,  and  is  not  allowed  unless  the 
be  ex-  right  is  expressly  given  by  statute.     Some 

given  by  States,  like  New  Jersey,  have  passed  laws  al- 
statute  law.  iQ^j^g  domestic  Corporations  to  hold  and  sell 
stock  of  domestic  and  foreign  companies,  while  others 
allow  the  practice,  when  it  is  provided  for,  in  the 
charter.  This  and  other  privileges  conferred  by  the 
New  Jersey  statutes  account  for  the  incorporation  in 
that  state  of  such  a  large  number  of  corporations. 

Insolvency  arises  when  a  business  enterprise  is  not 
able  to  meet  its  obligations.      The  total  assets  of  an 
enterprise  may  be  greater  than  its   obliga- 
tions, but  as  the  latter  are  payable  in  cash, 
it  matters   not   how   great   the  imsalable  assets  are. 
The  chief  consideration  is  ready  cash  to  meet  obliga- 
tions.    Insolvency  arises  from  many  causes,  the  most 
important  are, — lack  of  capital,  incompetence, 
specific  conditions,  fraud,  inexperience,   and 
neglect.    Two  chief  methods  are  in  practice  for  deal- 
ing with   insolvency,  —  bankruptcy   and   receivership. 
Methods       The    constitution   gives    Congress    the    sole 
^^^^     jurisdiction  over  bankruptcy,  and  that  body 
solvency.       in   1898   passed    the   National   Bankruptcy 
Act,  outlining  a  uniform  bankruptcy  procedure  for  the 
whole  country.     Individuals  or  partnerships  may  ask 
a  federal  court  to  adjudge  them  bankrupts  in  order  to 


INTERIOR  ORGANIZATION  69 

have  a   discharge   from   their  obligations.      Creditors 
whose  claims  are   unsatisfied  may  demand,  Bank- 
that  a  concern  be  adjudged  a  bankrupt,  the  "»ptcy. 
business    closed,    and    the    assets    distributed    among 
them.     The  former  is  known  as  voluntary.  Voluntary, 
and  the  latter  as  involuntary  bankruptcy,   involuntary. 

The  National  Bankruptcy  Act  is  somewhat  strict  with 
corporations.     No  corporation  can  be  adjudged  a  volun- 
tary bankrupt,  but  all  corporations  engaged  Corpora- 
in  manufacturing,  mining,  trading,  publishing,  ^oiun^My 
printing,  or  mercantile  pursuits,  having  debts  bankrupts, 
amounting  to  one  thousand  dollars  or  more,  may  be  ad- 
judged involuntary  bankrupts.     All  other  corporations 
including  banks,  trust  companies,  and  railroads,  cannot 
become  bankrupts. 

The  second  method  is  to  petition  a  court  of  equity  for 
protection  of  property  and  supervision  of  the  business 
until  a  settlement  of  affairs  can  be  obtained.  If  the 
judge  suspects  no  fraud,  the  petition  is  granted,  and  an 
official,  called  the  receiver,  is  appointed  to  Receiver- 
take  charge  of  the  business,  until  he  is  dis-  ^^p- 
charged  by  the  court.  The  court  in  the  order  of  ap- 
pointment usually  defines  the  powers  of  the  receiver. 

The  receiver  at  once  takes  possession  of  the 

,     ,       -       .  .        ,  Receiver, 

property  of  the  busmess  enterprise,  m  trust 

for   the   creditors,  and  other  interested   parties.     The 

receivership  may  have  for  its  object  either  the  winding 

up  of  the  business,  and  final  distribution  of  ^ 

,    .  .  .  Purposes 

assets,  or  tiding  the  business  over  a  period  of  of  receiver- 
financial  embarrassment.    In  the  first  case,  the  ^  ^* 
receiver  is  empowered  by  the  court  to  convert  the  assets 


^o  ECONOMICS  OF  BUSINESS 

into  cash,  collect  all  debts  due  the  enterprise,  by  due 
process  of  law  if  necessary,  and  use  the  money  obtained 
to  settle,  so  far  as  it  will  go,  the  claims  of  the  creditors. 
Secondly,  if  the  embarrassed  business  enterprise  is 
one  with  a  large  amount  of  capital  invested  in  con- 
crete form,  as  a  manufacturing  plant  or  railroad,  the 
purpose  of  the  receivership  is  not  liquidation  and  the 
winding  up  of  the  business,  but  a  temporary  supervision 
and  operation  of  the  enterprise.  The  receiver  is  ap- 
pointed by  the  court  to  continue  operation  of  the 
Powers  of  business.  He  is  subject  in  all  things  to  the 
receiver.  direction  and  control  of  the  court,  whose  officer 
he  is,  and  when  in  doubt  about  his  duty,  he  should  appeal 
to  the  court  for  specific  instructions.  The  court  is  the 
Receiver,  employer,  and  the  receiver  simply  its  agent. 
of  the  ^^^  receiver  has  no  right  to  incur  any  Ifability 

court.  or  in  any  way  hazard  the  funds  in  his  custody 

without  consent  of  the  court.      He  has,  nevertheless, 
power  to  conduct  the  business  in  an  efl&cient  manner, 
and    pay    ordinary    expenses    necessary    for 

His  duties.  -r*        i 

that  purpose.  But  he  cannot  hire  extra  em- 
ployees, buy  equipment  or  machinery,  or  incur  extra 
expenses  without  the  court's  permission.  His  duty  is 
simply  to  observe  good  faith  in  all  his  transac- 
tions, and  to  exercise  reasonable  diligence  and  care 
in  the  management  of  his  trust.  For  violation  of 
his  duty,  the  statutes  generally  provide  that  he  is  not 
Causes  for  ^^^Y  personally  responsible,  but  may  be  dis- 
removai.  missed  from  office.  Many  states  in  their 
statutes  give  causes  for  which  a  receiver  may  be  re- 
moved, as  for  example,  mismanagement,  refusal  to  comply 


INTERIOR  ORGANIZATION  71 

with  the  requirements  of  law,  insolvency,  refusal  to  give 
bonds,  incompetency  on  account  of  lunacy,  and  drunken- 
ness. Frequently  a  receiver  is  able  to  put  an  insolvent 
corporation  on  a  sound  financial  basis,  and  in  a  position 
to  meet  further  obligations.  Then  the  court.  His  dis- 
on  receiving  a  proper  accounting,  discharges  ^^^s^- 
him  and  returns  the  management  of  the  corporation  to 
the  stockholders.  At  other  times,  the  creditors,  reahzing 
that  they  cannot  get  payment  in  cash,  come  to  an  under- 
standing, and  reorganization  follows. 

Reorganization  is  the  readjustment  of  the  affairs  and 
securities  of  a  corporation  on  a  new  basis,  and  the  for- 
mation of  a  new  corporation  to  continue  the  Reorgani- 
old  business.     Before  reorganization,  a  cor-  nation, 
poration  usually  passes  through  a  period  of  receivership. 
A  committee  is  chosen  to  get  the  amount  and  character 
of  the  company's  obHgations,  and  to  formulate  a  plan 
for  reorganization.     Sometimes  the  members  are  chosen 
by  bondholders,  and  sometimes  leading  bond-  preUminary 
holders    appoint    themselves,    but    they    are  procedure, 
usually  of  such  a  character,  that  they  get  the  support 
of  their  fellow  bondholders.     After  considerable  delay, 
the  organization  committee  produces  a  plan,  and  the 
bondholders  are  offered  the  choice  between  a  contest 
conducted  at  great   disadvantage  and  expense,  or  the 

acceptance  of  such  terms  as  may  be  offered.  ^ 

"^  Orgamza- 

Whenever  agreement  is  reached,  the  purpose  tioncom- 
of  the  receivership  is  accomphshed.     The  reor-  °"**®®" 
ganization  committee  describes  what  is  to  be  done  with  the 
bondholders  and  stockholders.     The  senior  bondholders 
are  usually  given  new  bonds  for  full  amount  in  the  new 


72  ECONOMICS  OF  BUSINESS 

corporation,  or  bonds  for  part  and  preferred  stock  for 
Treatment  pa-^t.  Various  methods  are  employed  in  deal- 
of  bond-        insf  with  the  junior  bondholders.     They  may 

holders  and     ^     .  ^  j      ..      i     f       ..u    •  ♦.• 

stock-  be  given  preferred  stock  for  their  securities, 

holders.  junior  bonds,  or  part  in  bonds  and  part  in 
preferred  stock.  The  preferred  stockholders  may  be 
given  a  lesser  amount  of  stock  in  the  new  corporation 
or  an  equal  amount,  but  in  either  case,  they  are  usually 
taxed  an  assessment  in  order  to  raise  funds.  The 
common  stockholders  may  lose  their  stock  altogether, 
may  be  given  a  lesser  or  equal  amount  in  the  new  cor- 
poration, but  if  given  stock  at  all,  an  assessment  is 
levied.  Cash  must  be  raised  to  pay  the  floating  debt 
and  provide  working  capital.  The  usual  method  is  to 
Assess-  levy  assessments  upon  the  stockholders.  Fre- 
mentsto  quently  assessments  are  also  levied  upon  the 
money.  junior  bondholders.  The  heaviest  assess- 
ments are  made  upon  the  common  stockholders,  and  the 
lightest  upon  the  junior  bondholders.  If  the  stock- 
holders refuse  to  pay  the  assessment,  they  lose  their 
equity  in  the  corporation.  The  common  stockholders 
frequently  prefer  to  lose  their  stock  rather  than  pay  the 
high  assessments. 

To  reduce  the  fixed  charges  below  earnings,  the  com- 
mon practice  is  to  give  the  old  bondholders  part  of  the 
Means  for  amount  of  the  old  bonds  in  new  bonds  and 
miuang  p2^j.|.  jj^  stock.  Sometimes  the  amount  of 
charges.  the  new  bonds  and  stock  equals  the  old  securi- 
ties, but  frequently  there  is  a  bonus  in  stock.  Again, 
old  bonds  may  be  converted  into  new  bonds,  bringing  a 
lower  rate  of  interest,  the  reduction  of  course  varying 


INTERIOR  ORGANIZATION  73 

with  the  relative  strength  of  the  various  claims.     Re- 
organization is  effected  only  by  the  unani- 
mous   consent    of    the    bondholders.     Even  tion  needs 
though  nearly  all  of  the  bondholders  assent,  "0^^*01^ 
reorganization  without  foreclosure  does  not  ^o^d- 
bind  those  bondholders  who  refuse  to  give 
their  consent. 

When  a  company  is  foreclosed  and  sold,  its  purchaser 
gets  the  property  free  from  all  claims  of  unsecured  cred- 
itors, and  the  contracts  and  liabilities  of  the  pore- 
old  company.  The  buyer  is  free  of  all  debts  closure, 
except  the  lien  subject  to  which  he  buys.  Bondholders 
frequently  seek  foreclosure,  and  then  buy  and  reorganize. 
Although  the  new  company  is  by  statute  given  all  the 
property  rights  and  privileges  of  the  old,  it  is  a  new 
corporation. 

QUESTIONS 

1.  What  are  dividends,  by  whom  declared,  rights  of  stock- 
holders to  and  redress  if  not  declared  ? 

2.  State  powers  and  rights  of  stockholders. 

3.  Give  qualifications,  powers  and  duties  of  directors. 

4.  What  important   role   do  dummy  directors    play  in 
the  business  world  ? 

5.  What  are  the  powers  and  duties  of  the  chief  corporation 
ofl&cers  ? 

6.  Name  and  explain  the  different  kinds  of  bonds. 

7.  What  is  the  proper  basis  of  capitalization  ? 

8.  What  is  watered  stock  and  how  is  its  presence  deter- 
mined? 

9.  What  is  the  function  of  the  promoter  in  our  industrial 
system  ? 

10.  Outline  the  steps  necessary  in  promoting  a  corporation. 


74  ECONOMICS  OF  BUSINESS 

11.  In  what  way  does  an  underwriter  assist  corporation 
formation  ? 

12.  What  is  the  r61e  played  by  holding  companies  in 
corporation  control  ? 

13.  What  restrictions  does  the  National  Bankruptcy  Law 
place  upon  corporations  ? 

14.  What  is  the  significance  of  the  fact  that  a  receiver  is 
the  agent  of  the  court? 

15.  Outline  a  plan  for  the  reorganization  of  a  company  in 
financial  difficulties. 

REFERENCES 

W.  H.  Lough,  Jr.,  "Corporation  Finance";  W.  H.  Lyon, 
"Capitalization";  W.  A.  Wood,  "Modern  Business  Corpo- 
rations"; T.  L.  Greene,  "Corporation  Finance,"  Chs.  I,  II, 
VIII;  E.  S.  Mead,  "Corporation  Finance";  J.  W.  Jenks, 
"The  Trust  Problem,"  Chs.  V,  VI,  VII ;  R.  J.  Frank,  " Science 
of  Organization  and  Business  Development "  ;  J.  J.  Sullivan, 
"American  Corporations";  T.  Conyngton,  "Corporate  Or- 
ganization"; H.  C.  Bentley,  "Corporate  Finances  and  Ac- 
counting," Chs.  XXX,  XXXI,  XXXII;  W.  A.  Prendergast, 
"Credit  and  its  Uses,"  Ch.  XVIII;  S.  Kirschbaum,  "Busi- 
ness Organization  and  Administration,"  Ch.  XXI  ;  "  Busi- 
ness Administration,"  edited  by  W.  D.  Moody,  Vol.  X,  Ch. 
XVII ;  J.  J.  Sullivan,  "  American  Business  Law,"  Part  III ; 
T.  Conyngton,  "  Corporate  Management,"  Chs.  IV-VIII. 


CHAPTER  IV 

PRINCIPLES   OF  MANAGEMENT 

Through  the  development  of  machinery  and  the  use 
of  large  sums  of  capital,  modern  business  has  developed 
during  the  last  few  years  at  great  strides,  organiza- 
Business  is  too  big,  interests  are  too  varied,  ^ng'^act 
for  one  man  to  carry  on  an  enterprise  under  which  has 
the  old  method.     The  corporation  gradually  poration  ' 
evolved  as  the  form  suitable  to  conducting  possible, 
business  on  a  large  scale.     It  signifies  the  resources,  the 
brains,  and  the  work  of  many  men  merged  for  one  pur- 
pose in  a  business  unit.     The   one   factor  which  has 
made  the  large  corporation  possible  is  organization. 

Organization  is  the  arranging  or  putting  together  of 
mutually  connected  and  dependent  parts  into  ^^  ^^^^_ 
a  systematic  whole  so  that  they  will  work  to-  tion:  its 
gether  with  the   least   possible   friction  and  °^®*°^^^* 
the  greatest  harmony.     See  what  organization  means  to 
the  human  body  whose  organs  are  mutually  dependent 
upon  one  another,  each  one  of  which  is  dis-  Necessary 
tinct  in  itself,  but  cannot  act  without  reference  to  human 
to  some  other.     The  hand  does  not  stop  nor  the 
foot  falter  in  its  task ;  each  does  its  work  in  perfect  har- 
mony with  all  other  members  of  the  body.     The  history 
of  life  on  earth  is  simply  a  growth  of  a  more  perfect 
organization,   starting   with    the    simple-celled   amoeba 

7S 


76  ECONOMICS  OF  BUSINESS 

and  reaching  perfection  in  man.  Organization  is  not 
Essential  confined  to  living  organisms.  It  imparts 
gaMzed  stability  and  definiteness  to  the  social  group, 
society.  and  without  it,  the  state  could  not  exist.  The 
United  States  as  a  nation  is  a  complex  type  of  political 
organization.  The  nation  is  best  served,  and  the  or- 
ganization approaches  perfection,  when  all  parts  of  the 
political  unit  work  effectively,  and  harmoniously  for  the 
common  good  of  the  nation  as  a  whole.  Organization 
is  the  basic  foundation,  not  only  of  Hving  organisms, 
but  also  of  the  various  forms  of  organized  society. 

Organization  is  equally  necessary  in  business.  The 
two  chief  essentials  in  every  business  are  capital  and  or- 
ganization, but  the  latter  is  the  more  important.  Andrew 
Two  Carnegie  once  said:  ^'Take  away  all  our  fac- 

essentials  .  .  . 

in  business,  tories,  our  trades,  our  avenues  of  transporta- 
tion, our  money,  but  leave  me  our  organization,  and  in 
four  years,  I  will  have  reestabhshed  myself."  Every 
business  should  have  an  organization,  because  without  it, 
industrial  and  commercial  development  would  be  im- 
Business  possible.  Busincss  organization  is  the  or- 
organiza-       ganizing  of  the  constituent  parts  of  an  enter- 

tion« 

prise  into  one  systematic  whole,  and  is 
successful  when  all  work  effectively  and  harmoniously 
for  the  welfare  of  the  business  enterprise. 

Organization  consists  of  men ;  it  is  a  collection  of  indi- 
viduals.   The  object  is  to  unite  individuals  into  a  body 

^..  .  *  working  toward  a  common  end.  The  men 
Object  of  ° 

organiza-  should  work  together  for  the  welfare  of  the 
*^°°*  business,  even  though  each  member  has  his  own 

ideas  and  desires.     One  aim  is  to  abolish  antagonism  be- 


PRINCIPLES   OF  MANAGEMENT  77 

tween  employer  and  employee,  or  between  superintendent 
and  workman,  and  to  make  all  feel  that  they  have  a  com- 
mon interest  in  the  success  of  the  business.    A  second  aim 
is  to  bring  about  a  systematic  connection  be-  ^^^^  ^^ 
tween  the  constituent  parts,  and  cooperate  all  organiza- 
in  working  toward  the  interests  of  the  whole. 
Certain  general  principles  underHe  organization,  but  fixed 
rules  cannot  be  laid  down  for  the  formation  and  develop- 
ment of   an  organization.     Each  business  has  peculiar 
conditions  of  its  own.     These  should  be  carefully  studied 
and  due  allowance  made  for  them.    An  organization  that 
would  be  a  success  under  one  set  of  circumstances, 
would  be  a  failure  under  another. 

All  human  beings  possess  physical,  moral  and  mental 
qualities.     These  are  necessary  to  a  greater  or  lesser 
degree  in  all  classes  of  work.     With  unskilled  Physical, 
labor,  and  positions  of  lesser  importance,  the  mentaf^*^ 
physical  is  the  most  important;    with  the  quauties. 
skilled  trades,  and  positions  of  increasing  responsibility, 
the  mental  grows  in  importance,  while  with  all  kinds  of 
work,  the  moral  is  absolutely  essential.    It  mat-  j^^^^ 
ters  not  how  healthy  a  man  is,  or  what  ability  quauty 
he  has,  if  he  is  dissipated,  he  is  physically  and  °®*^®®^"^* 
morally  unfit  to  be  a  member  of  a  high-grade  organiza- 
tion.  Dissipation  gradually  affects  his  physical  Effects  of 
and  mental  powers,  weakens  his  sense  of  re-  dissipation, 
sponsibility,   increases    irregularity  in  attendance  and 
carelessness  in  work.     The  dissipated  employee  soon  be- 
comes a  derelict  upon  the  organization  rather  than  an 
integral  part  of  it,  and  his  services  must  soon  be  dis- 
pensed with  in  order  to  avoid  friction  and  loss.    The 


78  ECONOMICS  OF  BUSINESS 

members  of  a  high-grade  organization  should  be  healthy, 
strong  and  vigorous,  possess  required  ability  for  the 
work,  and  have  a  high  sense  of  moral  duty. 

From  the  beginning  of  a  business,  and  as  long  as  it 

exists,  emphasis  should  be  placed  upon   the  selection 

and  combinations  of  individuals  who  consti- 

Importance 

of  proper  tute  the  organization.  Great  care  and  skill 
ofbosses  should  not  only  be  taken  in  the  proper  selection 
and  work-  of  men  for  the  different  places,  but  also  in  their 
proper  adjustment  into  groups  which  combine 
to  form  the  organization.  The  cooperation  of  the  dif- 
ferent independent  groups  into  one  united  harmonious 
whole  is  not  an  easy  task,  and  is  a  test  of  the  ability  of 
an  entrepreneur.  In  accompUshing  cooperation,  the 
selection  of  the  proper  superintendents  and  bosses  plays 
an  important  role.  A  rough,  surly  boss  may  be  the 
cause  of  much  friction  and  lack  of  harmony. 

The  duties  of  bosses  and  men  should  be  clearly  de- 
fined, and  known  to  all,  so  that  no  friction  arises 
through  misunderstanding  in  giving  and  obeying  orders. 
Each  individual  connected  with  an  organization  should 
be  placed  where  his  services  will  best  aid  the  business  as  a 
whole,  and  be  allowed  to  do  his  work  without  inter- 
ference from  others,  and  at  the  same  time,  each  should 
have  his  interest  centered  in  the  welfare  of  the  business, 
and  bring  to  it  his  best  ability  and  judgment.  The 
strength  of  an  organization  lies  in  the  fact,  that  each 
Responsi-  part  of  the  business  is  under  the  control  of  a 
ciei^iy  ^^^  particularly  qualified  to  handle  it  in  the 

defined.  best  possible  manner,  and  his  responsibility  is 
definitely  fixed  and  limited  to  the  proper  performance 


PRINCIPLES   OF   MANAGEMENT  79 

of  his  part  of  the  work.  The  cooperation  of  men 
and  their  enthusiasm  in  work  cannot  be  obtained  unless 
the  management  inspires  confidence  by  the  assurance  of 
a  proper  reward  for  services,  proper  place,  tools,  and  treat- 
ment while  at  work,  and  a  certain  degree  of  permanency 
in  work.  An  organization  to  be  successful  should  have 
at  its  head  a  strong  resourceful  leader,  a  care-  Elements 
fully  selected,  well- trained  and  enthusiastic  necessary 

X.  ,  .  1      1         \  1     .      .         ^o^  success 

staff,  a  close  contact  with  the  nien,  brmgmg  inorgani- 
with  it  close  cooperation  and  sympathy  be-  ^^**°^ 
tween  the  management  and  employees  in  general. 

From  the  past,  successful  business  men  learned  that 
their  success  was  due  largely  to  their  efficient  and  en- 
thusiastic working  forces.     This  emphasizes  the  impor- 
tance of  a  high-grade  organization,  and    to-day  it  is 
considered  one  of  the  most  valuable  assets  of  a  business. 
Attention  is   drawn   to   the  study  of  the  essentials  of 
organization,  and  the  result  is   a   complete   change  of 
attitude   of   employers   toward   employees.     Successful 
industrial  development  has  in  the  past  been  concerned 
with    the   acquirement    of    highly    efficient    buildings, 
machinery,  tools,  and  their  efficient  management,  but 
to-day  it  is  the  employee  who  is  receiving  attention. 
The  reahzation  by  employers  that  the  human  importance 
element  is  the  most  important  part  of  a  sue-  ^^  *® 
cessful  business  results  in  better   treatment,  element  in 
working  conditions,  pay,  and  a  better  under-  ^*»siness. 
standing  between  employer  and  employee.     An  organi- 
zation to  be  effective  should  look  after  and  take  care 
of  the  men  who  compose  it,  because  their  development 
means  greater  success  to  a  business.     The  employee  is 


8o  ECONOMICS  OF  BUSINESS 

no  longer  hired  to  purely  fill  a  definite  position  that 
precludes  advancement,  but  he  is  hired,  because  of  his 
possibilities  for  advancement.  The  importance  of  a 
high-grade  organization,  with  its  harmony,  cooperation 
and  enthusiasm  working  toward  greater  efficiency,  is 
recognized  by  all  business  men,  and  many  are  attracted 
to  the  study  of  methods  of  acquirement. 

One  of   the  essentials  of   success  in  organization  is 

the  application  of  system  in  handling  men  and  affairs. 

Organization  consists  of  individuals;   system 

System.  ,  " 

consists  of  ways  and  means.  System,  as  ap- 
plied to  business,  consists  of  rules  and  regulations,  which 
Its  mean-  are  worked  out  and  adopted  as  governing  the 
^^'  actions  of  the  members  of  an  organization. 

The  general  principles  underlying  system  are  simply 
the  reduction  of  methods  employed  by  successful  entre- 
preneurs to  rules.  No  man  can  accomplish  much  without 
Vital  system.     It  is  a  vital  necessity  in  our  modem 

necessity  business  life,  as  every  enterprise,  whether  large 
m  busmess.  ^^  gj^all,  must  have  some  organized  method  of 
transacting  business,  which  is  system,  but  it  may  not  be 
called  such.  Everywhere  in  the  industrial  and  com- 
mercial world,  a  consistent  application  of 
structure  clearly  defined  rules  of  organization  and 
oforgani-      methods  are  effective  in  bringing  better  re- 

zation.  °     ° 

suits.  System  is  the  basic  structure  of  or- 
ganization, whereas  organization  is  the  essential  and 
fundamental  foundation  of  business. 

Alexander  Hamilton  once  said:  "A  government  must 
be  fitted  to  a  nation  much  as  a  coat  to  an  individual,  and, 
consequently,  what  may  be  good  at  Philadelphia  may 


PRINCIPLES   OF   MANAGEMENT  8i 

be  bad  at  Paris  and  ridiculed  at  St.  Petersburg."  So 
a  system,  which  is  effective  in  one  enterprise,  Methods 
may  work  indifferently  in  another,  and  be  a  ^y^^^™^ 
complete  failure  in  a  third.  No  system  fits  conditions, 
all  cases.  Methods  and  systems  should  vary  with  condi- 
tions. Many  failures  have  resulted  from  trying  to 
force  a  cut-and-dried  system  on  an  enterprise,  the  only 
reason  being  that  it  has  succeeded  in  another,  but  the 
fact  that  it  worked  under  different  conditions  was  over- 
looked. A  workable  system  is  evolved  from  within 
an  organization,  not  brought  in  from  the  outside.  The 
professional  systematizer  usually  installs  a  a  workable 
more  or  less  stereotyped  system,  without  due  system  is 

evolved 

consideration  to  the  actual  conditions  exist-  from  the 
ing  in  an  enterprise.  His  system  invariably  ^*^*°^* 
proves  unworkable  and  blame  is  attached  to  the  system, 
whereas  the  fault  was  in  the  introduction  of  impracticable 
rules  and  methods.  The  right  thing  used  in  the  wrong 
place  rarely  succeeds.  Each  particular  business  has 
its  own  features  which  should  determine  the  system  that 
is  to  secure  results. 

The  proper  method  of  introducing  a  system  is  to  have  a 
careful  study  made  by  one  whose  knowledge  of  conditions 
as  they  exist,  constitutes  him  as  most  compe-  p^.^ 
tent  to  know  the  situation  and  deduce  proper  method  of 
rules,  regulations,  and  methods  of  procedure. 
With  care  in  the  selection  of  simple  forms,  easy  of  analy- 
sis, giving  sufficient  details,  but  eliminating  unnecessary 
data,  a  system  will  be  evolved  which  will  be  successful 
and  prove  a  valuable  asset  to  a  business.     But  it  must 
not  be  forgotten  that  no  system  can  of  itself  run  a  busi- 


82  ECONOMICS  OF  BUSINESS 

ness  smoothly  and  efficiently.  System  is  a  good  servant, 
but  a  bad  master  and  should  be  used  only  as  a  tool  in 
the  hands  of  a  business  man.  A  system  when  once 
A  system  installed  should  not  be  made  the  object  of 
should  not     careless     experimentation     and     subject     to 

be  subject  .  ■; 

to  sudden  sudden  changes.  By  such  tactics,  the  best 
changes.  system  would  soon  be  destroyed,  and  lose  its 
purpose  and  efficiency.  This  does  not  mean  that  rules 
and  regulations  laid  down  by  a  system  should  not  be 
changed  to  meet  new  conditions.  Careful  investigation 
should  be  made  by  men  competent  to  analyze  con- 
ditions, and  only  on  their  recommendation  should 
changes  be  introduced,  and  in  no  case,  until  the  most 
searching  and  thorough  investigation  has  been  made. 
It  is  wrong  to  consider  the  rules  and  regulations  of 
system  as  rigid.  Every  progressive  business  is  con- 
tinually growing  and  so  may  soon  outgrow  its  system. 
A  good  system  should  be  flexible  and  subject  to  change 
to  meet  new  conditions.  A  system  must  grow  with  a 
business  and  be  made  suitable  for  the  new  conditions 
introduced  through  development  and  improvement. 

"Red  tape"  or  too  much  system  usually  arises  from 
too  great  complexity  in  a  system.  An  elaborate,  com- 
•'  Red  plex  system  causes  confusion  through  failure 

tape."  ^Q  understand  its  workings.     A  great  variety 

of  forms  is  frequently  used  to  collect  data,  but  no  at- 
tempt is  made  to  unite  the  information  obtained  into 
a  systematic  whole  so  that  it  will  be  of  service.  The 
filled  forms  sooner  or  later  reach  the  waste-paper  basket, 
where  they  properly  belong.  In  such  cases,  the  pur- 
pose of  the  system  is  defeated  by  "red  tape."     "Red 


PRINCIPLES   OF   MANAGEMENT  83 

tape"  is  bad  system,  and  should  in  every  instance  be 
avoided. 

To    work    systematically    is    to    work    successfully. 
System  is  the  essential  element  upon  which  every  sub- 
stantial enterprise  is  based.     The  business  which  pays  no 
heed  to  it  conveys  to  the  observer  that  nothing  system  a 
permanent  is  intended,  while,  on  the  other  pe^^^-"^ 
hand,  a  carefully  worked  out  system  stamps  nency. 
an  enterprise  at  once  with  permanency  —  an  establish- 
ment which  means  business,  and  one  that  is  intended  to 
be  carried  on  for  some  future  time. 

The  unmethodical,  unsystematic  means  of  conducting 
enterprises  have  had  their  day,  but  unfortunately  have 
not  in  all  cases  ceased  to  exist.     A  careful  in  many 
observation  into  many  enterprises  shows  that  enterprises, 

.     „  ,  ^  ,  the  great 

system  is  practically  unknown.     One  wonders  want  is 
how  such  enterprises  can  continue  in  business,   ^y^*®°^- 
and    not    be    driven    into    bankruptcy.     The    greatest 
want  is  system,  the  application  of  a  few  simple  rules 
and  due  respect  for  the  old  time-honored  principle  that 
order  is  the  first  law  of  the  universe. 

A  smoothly  working  and  efficient  organization  is  an 
essential  and  vital  element  in  securing  success  in  every 
form  of  business.  A  successful  business  cannot  be 
conducted,  and  carried  on,  without  system  and  organiza- 
tion. Business  permanency  is  impossible  where  system 
is  ignored.    A  slipshod  condition  of  things  is  the  result. 

In  many  cases,  enterprises  have  been  driven  Results 

11  1        r  IT     ^^o"^  ^^^^ 

into   bankruptcy  as  a  result  of   unmethodi-  of  system. 

cal  ways  of  management.  With  keen  competition, 
organization  and  system  are  necessary  to  the  success- 
ful conducting  of  every  business  enterprise. 


84  ECONOMICS  OF  BUSINESS 

System  saves  time,  eliminates  ineffective  and  un- 
necessary effort,  cuts  expense,  and  insures  accuracy 
and  dispatch.  It  enables  the  entrepreneur  to  dismiss 
details,  and  at  the  same  time  keep  in  touch  with  the 
different  departments  of  a  business.  The  manager 
should  be  in  sympathy  with  it,  because  system  de- 
Ad  an-  mands  a  close  cooperation  and  sympathy 
tagesof  between  management  and  employees.  A 
sysem.  ^^^^  system  causes  coordination  of  all  the 
best  efforts  of  the  organization,  cooperation  of  all  its 
members,  enthusiasm  for  the  success  of  the  business, 
and  harmony  between  departments  and  members  of 
the  organization.  Such  a  system  holds  an  enterprise 
together,  acts  as  the  backbone  of  its  anatomy,  and 
assists  in  bringing  financial  success. 

Cooperation,  or  the  act  of  working  together  for  a 
common  purpose,  is  found  among  animals  as  well  as 
Co5pera-  among  human  beings.  It  is  hard  to  find  any 
**®^  human  activity  that  is  not  a  form  of  co- 

operation. Division  of  labor  is  not  only  based  on  co- 
operation, but  modem  industrial  development  would  be 
Cos  era-  impossible  without  its  aid.  Cooperation  of 
tionof  employees  is  the  first  purpose  of  organiza- 

empoyees.     ^.^^      j^  .^  ^^^  ^^1^  nieans  of  maintaining 

a  harmonious  relationship  between  members  of  a 
business  unit.  A  hearty  cooperation  between  em- 
ployer and  employee  is  the  main  strength  of  every 
organization  and  increases  the  efl5.ciency  of  both  capital 
itsim-  and    labor.     In    this    era   of    competition, 

portance.  antagonism  between  employers  and  em- 
ployees means  ruin,  and  its  place  should  be  taken  by  co- 


PRINCIPLES   OF  MANAGEMENT  85 

operation.  With  the  growing  importance  of  the  hiunan 
element  in  business,  cooperation  is  daily  receiving 
more  consideration. 

Forced  cooperation  means  nothing  but  disaster  to 
a   system  as  soon  as   the   strong    hand    is    removed. 
Men  have  no  interest  in  the  business,  their  p^j.^^^ 
thoughts  are  bent  on  securing  another  position,   cooper- 
where  the  driving  element  is  not  so  much  in 
evidence.     But  the  cooperation  in  which  the  bond  is  mu- 
tual interest  in  the  success  of  the  work  performed  pro- 
duces enthusiasm  and  stabihty  which  needs  no  outside 
support.    To  enlist  the  mutual  interest  and  hearty  sup- 
port of  employees  is  one  of  the  most  serious  and  impor- 
tant tasks  of    an  entrepreneur.     Success  often  hinges 
on   its  solution.      To   obtain   their    cooperation,    men 
should  be  given  a  square  deal,  proper  treat-  Means  of 
ment,  and  a  just  reward  for  their  services.  coSpcte-^ 
They   should   have   some   share  in  devising  tioJ^- 
methods  and  plans,  be  made  to  feel  that  they  are  an  in- 
tegral part  of   the  organization,  consulted  concerning 
difficulties,  and  encouraged  to  suggest  ways  of  overcom- 
ing them.    An  eminent  entrepreneur  compared  business 
to  a  three-legged  stool,  the  legs  of  which  were  capital, 
labor   and   management,  and  declared  that  with  the 
cooperation  of  all  three  the  greatest  success  is  achieved. 

A  true  spirit  of  cooperation  is  an  important  element 
in  every  enterprise,  but  very  frequently  it  is  lacking. 
Some  form  of  cooperation,  nevertheless,  exists  ^ 
in  every  form  of  business  even  where  employer  of  cosper- 
and  employee  are  estranged  or  only  on  friendly  *  °°' 
terms.     Working  together,  with  the  interest  of  the  en- 


86  ECONOMICS  OF  BUSINESS 

terprise  at  heart,  is  the  proper  spirit  of  workmen  and 
should  be  sought  by  every  management.  Cooperation 
has  two  sides,  but  the  employers  frequently  see  but  one. 
Benefits  They  beheve  that  workmen  should  cooperate 
should  be  with  the  management  to  produce  goods  at  low 
cost,  but  they  are  blind  to  the  fact  that  they 
should  cooperate  with  the  men  to  assist  them  to  earn 
higher  wages.  True  cooperation  cannot  exist  without 
mutual  benefits .  Management  and  workmen  should  each 
obtain  what  they  are  striving  for,  —  the  management  low 
costs,  the  workmen  higher  wages.  In  every  form  of 
business,  true  cooperation  is  more  than  a  theory,  it  is  a 
necessity,and  its  importance  is  gradually  being  impressed 
upon  every  entrepreneur. 

Coordination  is  the  act  of  bringing  dififerent  parts 
of  an  organization  together  so  that  they  act  in  harmony. 
Coordina-  ^^  business,  it  means  arranging  elements  so 
^®°-  that  each  is  working  to  capacity,  and  at  the 

same  time,  keeps  every  other  element  which  is  depend- 
ent upon  it,  working  to  its  capacity.  In  the  case  of 
men  and  machines  in  a  factory,  coordination  means  the 
working  of  each  to  full  capacity  all  the  time.  A  great 
AppUed  in  amount  of  time  is  wasted  in  waiting  for  mate- 
business,  j-ia^is^  supplies,  and  fixing  breakdowns.  Co- 
ordination demands  not  only  the  organization  of  groups 
of  proper  size,  but  prompt  arrival  of  materials  and 
freedom  from  breakdowns. 

Men  are  often  prevented  from  working  to  full  capacity 

by  doing  work  that  should  be  done  by  others  as 

poor  CO-        for  example,  a  mason  building  his  scaffold,  or 

ordination,     c^j-rying  his  brick.    A  machine  is  frequently 


PRINCIPLES   OF  MANAGEMENT  87 

kept  from  its  full  output  by  the  loafing  of  attendants, 
carelessness  in  feeding,  not  being  run  at  full  speed,  or 
loss  of  time  in  starting.     All  these  are  cases  of  imperfect 
coordination.     For    good    coordination,  four  Essentials 
essentials    are    necessary:     proper    planning  ^cootSoa^ 
of  work,  regular  arrival  of  material  and  sup-  tion. 
plies,   prompt  and  proper  repairs  to  equipment,  and 
proper  quality  of  supplies.     With  the  growth  of  com- 
petition, the  necessity  for  proper  coordination  assumes 
greater  and  greater  importance.     It  lessens  waste  and 
increases  efficiency  in  output,  and  at  the  same  time,  as- 
sures regular  and  simultaneous  efforts  on  the  part  of  a 
number  of  individuals,  or  departments  working  for  a 
common  purpose. 

The  ordinary  meaning  of  efficiency  is  the  ratio  between 
the  actual  performance  of  a  task  and  its  ideal  perform- 
ance.   As  applied  to  business,  it  is  the  rela- 

1  1  .  1-11  11         Efficiency. 

tion  between  the  action  which  has  produced  a 
known  result,  and  the  action  which  has  been  previously 
determined  for  producing  a  similar  result.     The  best 
possible  performance  of  an  action  is  obtained  by  having 
the  task  performed    with  the  best   possible  Efficiency 
tools,  equipment,  and  methods,  the  best  skill  "^  business, 
obtainable  and  the  elimination  of  all  unnecessary  move- 
ments, but  without   strenuous  effort.     This   is   taken 
as  a  standard  for  the  performance  of  similar 
actions.      The  efficiency  of  an  action  varies  foreffi- 
as  its  performance  varies  with  the  standard.    *^*®°*^^* 
Efficiency  increases  as  the  performance  approaches  the 
standard,  and    the   aim  should   be    to   have   as   little 
difference  as  possible  between  the  two. 


88  ECONOMICS  OF  BUSINESS 

The  study  of  how  to  obtain  efficient  performance 
is  not  by  any  means  new.  It  is  one  of  the  oldest 
Effidenc  things  in  the  world.  From  the  most  primitive 
not  times,  men  under  a  natural  inherent  stimulus 

mo  era.  y^^lyq  always  sought  to  obtain  a  desired  result 
with  the  least  possible  effort.  Since  man  began  to  work 
for  man,  various  methods  have  been  devised  for  convert- 
ing a  given  outlay  of  time  and  labor  into  the  largest 
attainable  result.  The  methods  are  as  numerous  as 
they  are  varied  and  involve  every  device  of  human  in- 
genuity. Kindliness  and  cruelty,  high  and  low  wages, 
selection  of  the  most  intelligent  grade  of  workers, 
Foraier  carefully  supervised  training  and  drilling, 
SSdSng  steady  work,  and  reward  schemes  have  all 
results.  been  experimented  with,  but  with  varying  re- 
sults. Efficiency  is  no  new  word,  but  to-day,  it  repre- 
sents a  new  method  devised  for  its  attainment. 

Efficiency  is  a  condition,  and  determined  only  by 
knowing  how  much  time,  energy  and  material  are  actually 
^  ,     .        spent  to  obtain  certain  results,  and  how  much 

Deterauna-       ^  ,        ' 

tion  of  is  really  necessary  to  obtain  the  same  results. 

efficiency.  j^  .^  ^  great  detector  of  losses  and  wastes  in 
any  industrial  system.  Wastes  and  losses  which  were 
not  even  suspected  are  detected,  and  their  value  meas- 
ured. Their  elimination  is  frequently  only  a  slight  mat- 
ter of  readjustment.  With  our  keen  competition,  and 
our  gigantic  manufacturing  plants,  the  new  efficiency 
method  is  a  boon.  Losses  have  frequently  given  way 
to  profits,  and  success  has  followed  where  otherwise 
failure  would  have  resulted. 
In  efficiency  management,  the  most  important  factor 


PRINCIPLES   OF   MANAGEMENT  89 

to  be  considered  is  the  labor  force.     Efficiency  when 
applied  to  labor  means  obtaining  the  maxi-  Meaning 
mum  return  for  a  minimum  outlay.     If  one  fgafpUed^^ 
man  is  more  efficient  than  another,  he  ob-  to  labor, 
tains  with   a  given  expenditure  of    energy,  time   and 
capital,  a  larger  though  equally  good  product.     Waste 
of  time  and  energy  in  the  performance  of  manual  labor 
is  not  very  visible  at  a  glance.    A  workman  may  be 
most  industrious,  and  exerting  himself  to  the  utmost, 
but  neither   fact   proves   that   he   is   efficient.      Only 
a  careful  analysis  of  the  work  which  he  is  doing,  his 
method  of  doing  it,  and  the  length  of  time  Means  of 
that  he  is  taking  to  do  it  give  a  true  concep-  attaining 

.    ,  .        rr    '  rm  •  c      i       efficiency 

tion  of  his  efficiency.  Ihe  question  of  ob-  in  labor 
taining  the  greatest  possible  efficiency  of  ^°^^^' 
the  employees,  and  at  the  same  time,  retain  their 
cooperation,  enthusiasm,  and  interest  is  one  that  taxes 
the  ingenuity  and  abiHty  of  an  entrepreneur.  An 
efficient  labor  force  is  essential  to  a  successful  business. 
Andrew  Carnegie  once  said  that  his  success  was  due  not 
only  to  surrounding  himself  with  clever  men,  but  also 
to  knowing  how  to  use  their  brains  to  the  best  ad- 
vantage. 

In  obtaining  efficiency  not  only  labor,  but  the  plant 
should  receive  careful  consideration.  To  secure  efficiency 
in  a  plant  requires  careful  study  and  planning.  Efficiency 
It  demands  a  carefully  selected  location,  and  "^  factory, 
properly  constructed  buildings,  the  best  possible  ma- 
chinery carefully  arranged,  good  tools,  machinery  and 
tools  always  kept  in  the  best  repair,  the  use  of  the  best 
methods,  the  careful  planning  of  work,  the  handling*  of 


QO  ECONOMICS  OF  BUSINESS 

raw  materials,  goods  in  process  of  production  and  finished 
products  in  such  a  way  that  the  machines  are  never 
Efficient  delayed  in  their  work,  and  lastly,  standardize 
factory.  ation  of  tools,  methods  of  work,  and  quality 
of  product.  An  efficient  factory  would  then  be  one 
equipped  with  the  best  machinery,  always  in  best  re- 
pair, run  always  at  full  speed,  to  full  capacity,  produc- 
ing goods  of  the  highest  quality,  the  buildings  and  equip- 
ment so  arranged  and  methods  of  work  so  employed 
that  the  greatest  return  is  obtained  with  the  least  ex- 
penditure of  effort. 

Strenuousness  and  efficiency  are  not  similar  terms, 
but  are  antagonistic  in  meaning.  The  former  implies 
strenuous-  ^^^  putting  forth  of  more  effort,  while  the 
ness  vs.        latter  means  putting  forth  less.     The  former 

effiaency.  ■,         .  .^       ^      ^ 

overtaxes  strength,  while  the  latter  does  not. 
To  walk  four  miles  an  hour  is  efficient,  but  to  go  six  by 
extra  exertion  is  strenuous.  Efficiency  brings  greater 
results  with  lessened  efforts  while  strenuousness  brings 
greater  results  with  greater  efforts.  The  efforts  of  man 
should  be  made  efficient,  but  not  strenuous.  Strenuous- 
ness is  injurious  to  man  and  organization,  and  every  pre- 
caution should  be  taken  to  avoid  it. 

Efficiency  has  assumed  such  importance  that  it  is 
considered  one  of  the  fundamentals  of  the  industrial 

system.  The  greatest  waste  in  business  arises 
one  of  the  from  misdirected  human  effort.  Efficiency  is 
taS^f°the'  conserving  and  intelligently  directing  the 
industrial  energies  of  man,  and  the  converting  of  wasted 
system.  efforts  into  profitable  results.  Efficiency 
methods  have  in  the  past  been  confined  almost  entirely 


PRINCIPLES   OF   MANAGEMENT  91 

to  manufacturing,  but  they  may  be  applied  with  equal 
success  to  almost  every  Hne  of  business. 

Personality  is  an  important  factor  in  business  build- 
ing, and  is  the  element  which  makes  ejffective  organiza- 
tion possible.      Its  only  source  is  from  the 

,  .     ,       .  ,  ,  Personality, 

human  element  m  busmess,  the  men  who  carry 

on  economic  activities.  Personality  is  the  strongest 
bond  between  men  and  organization,  the  foundation  of 
confidence,  the  basis  of  permanent  growth,  itsim- 
and  the  Hving  spirit  of  an  organization,  portance. 
The  personality  of  the  management  should  be  felt  down 
through  the  organization  even  to  the  humblest  worker 
in  the  business. 

Dominating  every  great  organization  is  a  controlling 
force,  a  "man  behind,'^  whose   personaHty  stimulates 
into    action,  and    guides    the   whole    working    force. 
Such    a    man    should    have    character    and   charac- 
strength  combined  with  kindhness,  friendH-   anln^us-^ 
ness,  and  good  wishes  toward  his  men.    He  trial  leader, 
should    be    to    the    organization    what    the   governor 
is    to    the     engine.       He     should     always     keep     in 
touch  with  his  men,  and  be  ever  ready  to  discuss  any 
differences    which    may    arise.     Impartiahty    on    his 
part  is  almost   a   virtue.     Nothing  fosters   discontent, 
creates  friction,  and  throws  the  whole  working  force 
into  confusion  quicker  than  favoritism.    Angry  words, 
harshness  and  injustice  destroy  enthusiasm,  interest  and 
loyalty,  and  have  no  place  in  effective  organization. 

The  feehngs  which  men  have  towards  a  business 
are  governed  almost  entirely  by  their  feelings  towards 
the  man  who  directs  them  from  day  to  day.     It  must 


92  ECONOMICS  OF  BUSINESS 

Respect  ^^^  ^^  forgotten  that  men  are  not  bits  of 
for  the  machinery,  but  men,  and  as  such  possess  certain 

the  work-  rights  which  must  be  respected.  The  recogni- 
°*®^  tion  of  their  rights  and  making  them  feel  that 

they  are  real  integral  parts  of  the  organization  prevents 
friction,  and  works  towards  eflBiciency.  An  important 
problem  of  the  business  man  is  to  give  personality  to 
his  organization.  If  he  succeeds,  cooperation,  en- 
thusiasm, loyalty,  and  efficiency  follow,  and  upon  these 
depends,  to  a  very  large  measure,  the  success  or  failure 
of  his  undertaking. 

As  a  corporation  increases  in  size,  the  importance 

of  the  personality  of  the  leader  decreases,  and  that  of  the 

organization  through  which  he  exercises  his  per- 

iifiarge    ^    sonality  increases.     A  measure  of  efficiency  is 

corpora-        ^}^g  extent  to  which  the  enthusiasm  of  the 

tions. 

working  force  is  mamtamed  through  the  or- 
ganization. Nevertheless,  the  success  of  an  organization 
depends  largely  upon  the  choice  of  the  proper  head, 
a  man  who  has  the  character  and  strength  to  main- 
tain the  personahty  of  the  organization.  Many  enter- 
prises are  driven  into  bankruptcy  by  having  the  per- 
sonality of  the  organization  destroyed  by  a  weak  leader. 
It  matters  not  the  type  of  organization,  success  in  a 

great  measure  depends  upon  the  proper  rela- 
lationship  tionship  existing  between  the  management  and 
eSoyer  ^^^  employees.  In  business,  it  is  becoming 
and  em-  more  and  more  recognized,  that  the  successful 
^  °  *  entrepreneur  is  the  man  who  can  get  in  touch 
with  his  men,  and  maintain  their  loyalty  and  enthusiasm 
towards  the  organization  of  which  he  is  the  head. 


PRINCIPLES  OF  MANAGEMENT  93 

There  is  a  moral  obligation  due  an  employer  from 
every  employee  to  give  his  best  mental  effort  as  well 
as  his  manual  labor.     This  service  is  not  fully  ^ 
performed,  unless  the  men  become  enthusiastic  employee 
in  their  work,  and  work  with  their  whole  hearts  best  mental 
for  the  welfare  of  the  business.     To  obtain  and  ®^°^  *^ 

well  as 

preserve  this  attitude  of  employees  towards  manual 
their  employer  and  work  is  almost  priceless.  *  ^^' 
The  entrepreneur  should  identify  his  employees  with 
his  business,  should  make  them  feel  that  they  have 
a  stake  in  its  success,  and  that  the  organization  has 
an  interest  in  their  welfare.  Then  the  men  will  feel 
that  they  are  a  part  of  the  business  and  not  a  cog  in  a 
wheel.  Each  will  work  for  the  other's  welfare,  and  all 
for  the  success  of  the  enterprise. 

To  secure  skillful  men,  and  to  get  them  to  do  their 
utmost  for   the  business,    they   should  be   treated  as 
intelligent  men.     You  can  drive  an  ignorant  workman  to 
his  task,  but  the  skilled  man  recognizes  only  executive 
abiHty.     Men  should  be  led  through  self-interest,  not 
driven  Hke  slaves.    In  speaking  of  his  work.  Workmen 
a  man  once  remarked,  ''They  treat  me  like  Seated  as 
a  fool,  so  I  act  like  one."    Loyalty  of  em-  J»eii- 
ployees  toward  an  organization   cannot   be    expected 
without  impartial  fairness,  consideration  and  a  regard 
for  their  feelings.    No  work  calls  for  more  tactful  atten- 
tion than  the  handling  of  men.     To  get  the  loyal  support 
of  the  working  force,  to  make  every  man  feel  that  his 
interests  are  vitally  linked  with  those  for  whom  he  is 
working,  is  a  valuable  asset  to  any  business. 

The   efficiency   of   his   workmen   is    the   employer's 


94  ECONOMICS  OF  BUSINESS 

source    of    profits.    Nothing    affects    efficiency    more 

strongly  than  the  interest  which  an  employee 

suwess  a       takes  in  his  work.     The  aim  of  every  entre- 

matterof       preneur  should  be  to  increase  this  interest, 

business 

abUity,  loyalty  and  human  bond  between  employees 

an^ioyai^.  ^^^  employer.  A  man  once  spoke  with  a 
sneer  about  his  employer.  He  was  dismissed, 
not  because  he  sneered,  but  because  he  was  out  of 
harmony  with  his  work.  Wherever  there  is  lack  of 
loyalty,  there  is  no  enthusiasm,  and  without  enthusiasm, 
efficiency  is  lacking.  Business  success  is  a  matter  not 
only  of  business  ability,  but  confidence  and  loyalty  as 
well. 

Cooperation  and  loyalty  should  be  whole-hearted, 
and  then  we  have  enthusiasm.  Enthusiasm  once 
aroused  needs  only  direction  to  turn  it  into  success. 
A  very  important  asset  in  any  business  is  the  impression 
that  the  highest  official  knows  the  employee  personally, 
and  that  he  is  recognized  as  an  essential  part  of  the 
organization.  This  arouses  an  enthusiasm  which  paves 
the  way  for  success,  and  cannot  be  over-estimated. 

QUESTIONS 

1.  What  is  organization,  and  why  is  it  so  important  in 
business  ? 

2.  Why  cannot  standard  rules  of  organization  be  laid  down 
for  all  business  enterprises  ? 

3.  What  is  the  importance  of  physical,  moral  and  mental 
qualities  in  business  ? 

4.  How  must  responsibility  be  defined,  and  what  are  the 
consequences  in  case  it  is  not  ? 


PRINCIPLES   OF   MANAGEMENT  95 

5.  What  are  the  elements  working  towards  a  successful 
organization,  and  in  what  way  does  each  aid  ? 

6.  What  is  the  human  element  in  business,  and  why  was 
it  so  long  neglected  ? 

7.  What  is  system,  and  why  is  it  so  important  in  business  ? 

8.  Why  is  system  the  basic  structure  of  organization  ? 

9.  What  is  the  proper  method  for  installation  of  a  sys- 
tem ?    Why  do  many  systems  fail  ? 

10.  What  is  cooperation  and  how  is  it  obtained  ? 

11.  Why  is  the  true  spirit  of  cooperation  so  often  lacking 
in  many  business  enterprises  ?  Is  it  the  fault  of  the  employers 
or  employees,  or  both  ? 

12.  What  is  the  function  of  coordination,  and  how  is  it 
applied  to  business  ? 

13.  What  is  the  meaning  of  efl&ciency,  and  how  is  it  applied 
to  business  ? 

14.  How  is  efficiency  attained  (a)  in  the  labor  force ;  (b)  in 
the  plant ;  (c)  in  the  organization  ? 

15.  What  are  the  chief  characteristics  of  an  industrial 
leader,  and  what  is  the  role  of  personality  in  business  ? 

REFERENCES 

H.  Emerson,  "Efficiency,"  Chs.  I,  II;  H.  Diemer,  "Fac- 
tory Organization  and  Administration,"  Ch.  XXV;  W.  D. 
Scott,  "Increasing  Human  Efficiency  in  Business";  J.  L. 
Nicholson,  "Nicholson  on  Factory  Organization  and  Costs," 
Ch.  I;  C.  E.  Knoeppel,  "Maximum  Production,"  Chs.  II, 
III,  VI,  VII;  H.  Emerson,  "The  Twelve  Principles  of  Effi- 
ciency "  ;  O.  E.  Perrego, "  Modern  Machine  Shop,"  Ch.  XXXI ; 
S.  C.  C.  Parson,  "Business  Administration,"  Ch.  II;  The 
Business  Man's  Library,  Vol.  IX,  "  PersonaHty  in  Business" ; 
The  Business  Man's  Library,  Vol.  VI,  "Organizing  a  Fac- 
tory"; Wm.  F.  Book,  "The  Psychology  of  SkiU";   M.  L. 


96  ECONOMICS  OF  BUSINESS 

Cooke,  "Academic  and  Industrial  Efficiency,"  Carnegie 
Foundation  for  the  Advancement  of  Teaching,  Bulletin  5 ; 
H.  A.  Ruger,  "The  Psychology  of  Efficiency";  S.  Kirsch- 
baum,  "Business  Organization  and  Administration,"  Ch.  IX ; 
H.  Miinsterberg,  "Psychology  and  Industrial  Efficiency"; 
H.  Wood,  "  The  PoHtical  Economy  of  Humanism,"  Ch.  IV  ; 
W.  C.  Redfield,  "  The  New  Industrial  Day,"  Ch.  VIII ;  H. 
A.  Evans,  "  Cost  Keeping  and  Scientific  Management,"  Ch. 
IX ;  CD.  Hine,  "  Modern  Organization,"  Ch.  VIII. 


CHAPTER  V 

THE  ENTREPRENEUR 

During  the  handicraft  period  of  industry,  manage- 
ment was  simply  an  incidental  function  of  the  work  of 
the  business  man.  When  the  shoemaker  was  making 
the  whole  shoe,  buying  the  raw  materials,  and  selling 
the  product,  there  was  little  need  for  organizing  abil- 
ity. The  introduction  of  capital,  and  the  employment  of 
hired  employees,  created  a  demand  for  the  man  ^j^^  impor- 
who  could  organize  the  factors  of  production  t^nce  of  the 

1  .         ,     .  rr^i       .  .  .         entrepre- 

and  supervise  their  use.  The  increasing  size  newinbusi- 
of  the  business  unit  emphasized  the  impor-  °®®^* 
tance  of  organizing  and  executive  abiHty.  The  busi- 
ness manager,  or  the  entrepreneur,  the  man  exercising 
this  function,  is  to-day  the  most  important  factor 
in  business.  The  large  corporation  depends  more  for 
its  success  upon  the  abiKty  of  the  entrepreneur  than 
upon  any  other  factor  of  production.  Executive  ability 
stands  preeminently  in  the  foreground  as  the  basic  struc- 
ture of  large  corporations.  Possessing  executive  abiHty 
to  an  extraordinary  degree  explains  why  Americans  lead 
the  work  in  business. 

The  success  of  every  business  depends  in  a  large  measure 
upon  its  business  manager  or  entrepreneur,   j^^^^g  ^j 
His  duties  are  numerous  as  well  as  varied,  entrepre- 
He  plans  the  organization  and  works  out  its 
system.    Each  should  conform  to  the  needs  of  the  business 
H  97 


98  ECONOMICS  OF  BUSINESS 

and  be  best  adapted  for  the  particular  case.  All  parts  of 
the  organization  should  work  smoothly  and  harmoniously. 
The  system  should  be  simple,  of  few  forms,  easily  un- 
derstood yet  fully  and  carefully  outlining  the  work,  and 
collecting  the  necessary  information  for  the  manage- 
ment of  the  business.  The  entrepreneur,  by  his  care- 
fully planned  system,  keeps  in  constant  touch  with  the 
condition  of  every  part  of  his  organization.  He  origi- 
nates plans  or  policies  that  affect  the  organization  as  a 
whole,  and  keeps  both  his  organization  and  his  system 
abreast  of  changing  conditions,  arising  from  growth, 
development,  or  other  causes.  In  short,  the  entrepreneur 
is  the  executive  head  and  responsible  for  the  efficient 
management  of  the  business  enterprise. 

The  entrepreneur  hires  labor  and  assigns  each  em- 
ployee to  his   task.     He   rents  land,   borrows   capital, 
and  decides  to  what  use  each  is  to  be  put.     He 

The  entre-  .  ,        , . «.  r 

preneur  coordmates  the  different  factors  m  a  way  to 
^Isiand^'  produce  the  greatest  efficiency.  He  decides 
and  borrows  what  goods  are  to  be  produced,  their  quan- 
^^^  '  tity  and  mode  of  production.  In  the  pro- 
duction of  goods,  which  depend  for  their  demand  on 
fad  or  fashion,  an  entrepreneur  should  not  produce  too 
great  a  supply  over  his  orders,  because  he 
the  goods  cannot  tell  when  the  demand  will  diminish, 
duceV^^'  ^^^  ^^^^  ^^  ^^^^'  frequently  only  a  short 
their  quan-  time  elapses  before  it  ceases.  When  an  entre- 
mod^^  preneur  finds  that  his  goods  are  being  re- 
of  pro-  placed  bv  others,  he  frequently  prevents  loss 

duction.  f  ■'        ,         \  ?     ..  r     .1        T 

by  commencmg  the  production  of  other  fines. 
The  Studebaker  Company,  when  they  discovered  that 


THE  ENTREPRENEUR  99 

in  a  short  time  their  carriage  and  truck  business  would 
be  diminished  by  the  demand  for  automobiles  and  auto 
trucks,  installed  machinery  to  manufacture  the  latter. 
The  carriage  business  greatly  decreased,  but  the  new 
venture  more  than  offset  the  loss,  and  their  business 
as  a  whole  continued  to  prosper.  Finally  success 
often  depends  upon  the  choice  of  method  of  produc- 
tion. Andrew  Carnegie,  on  seeing  the  making  of  steel 
by  the  Bessemer  process,  at  once  realized  that  the 
American  manufacturer  who  would  first  introduce  the 
process  would  be  at  a  great  advantage  over  his  com- 
petitors. Much  against  the  wishes  of  his  partners,  he 
had  valuable  machinery  removed,  new  installed,  and 
in  a  short  time  was  making  Bessemer  steel.  This 
quick,  decisive  action  on  the  part  of  Carnegie  netted 
his  Company  several  millions  in  additional  profits. 

The  entrepreneur  assumes  the  risks  of  business. 
The  chances  of  loss  are  many  or  few,  but  in  every  case 
there  is  a  risk.  The  entrepreneur  may  open  a  store,  but 
he  takes  the  risk  of  getting  customers.  He  may  ^.^  assumes 
build  a  factory,  but  he  takes  the  risk  of  seUing  the  risks 
his  goods.  He  may  build  a  railroad,  but  he 
takes  the  risk  of  getting  traffic.  He  may  send  goods  to 
foreign  markets,  but  he  takes  the  risk  of  the  lowering  of 
prices  by  the  time  his  goods  are  put  on  the  market.  No 
enterprise  is  imaginable  in  which  there  are  not  certain 
risks,  and  these  are  borne  by  the  entrepreneur.  Those 
who  wish  to  avoid  risks  must  loan  their  money  at  inter- 
est, or  work  for  wages  or  salary. 

The    entrepreneur    relieves    the   possessors    of   land, 
labor   and   capital,  of  risks,  and  insures  them  against 


loo  ECONOMICS  OF  BUSINESS 

fluctuations  in  prices.  The  assumption  of  losses  aris- 
He  reUeves  ^^^  ^^^^  changes  in  prices  is  a  very  important 
the  owners  part  of  the  risk  function  of  the  entrepre- 
labOT  and  neur.  Prices  indicate  the  relarion  between 
capital  of  supply  and  demand  of  goods,  and  what  the 
people  must  pay  to  have  their  wants  satisfied. 
All  prices  are  liable  to  fluctuate,  because  a  change  in 
the  supply  or  demand  of  goods  has  its  influence  on  prices. 
Entrepreneurs  who  produce  for  the  general  market 
always  take  great  chances.  A  falling  off  in  demand 
or  a  glut  in  the  market  frequently  causes  a  lowering  of 
He  tinder-  prices  below  expenses  of  production.  Prices 
rS^s^o?^  may  not  change,  but  labor  troubles,  in- 
markets.  creased  wages,  or  increased  price  of  raw 
materials  may  bring  the  expenses  of  production  above 
the  price  line  at  which  some  time  before  the  entrepre- 
neur was  able  to  sell  at  a  profit.  Even  if  the  price 
which  the  entrepreneur  is  to  get  for  his  goods  should  be 
fixed  before  he  delivers  them,  as  in  the  case  where 
goods  are  made  to  order,  it  still  remains  uncertain  if  he 
will  gain  or  lose  by  his  work,  because  circumstances 
may  arise  that  greatly  increase  his  expenses,  and  cause 
loss  by  the  delivery  of  the  goods  at  the  contract  price. 
Difficulties  In  many  branches  of  trade,  especially  in  textile 
^°^2"\v.      industries,  the  difficulties  of  forecasting  the 

casting  tne  '  ° 

future.  future  are  great.     In  order  to  lessen  the  risk 

of  price  fluctuations,  many  entrepreneurs  make  it  a 
practice  not  only  of  making  a  special  study  themselves, 
but  employing  experts  to  study  the  movements  of 
fashion,  markets  for  raw  materials  and  finished  prod- 
ucts, general  state  of  trade,  conditions  of   the  money 


THE  ENTREPREl<Et7R  ifoi 

market,  possibility  of  labor  troubles,  trend  of  politics, 
and  other  causes  likely  to  influence  the  prices  of  their 
goods  during  the  coming  season. 

There  are  always  risks  arising  from  circumstances 
over  which  the  entrepreneur  has  no  control,  as  loss 
through   fire,  lightning,   hail,  etc.     In   these  Risks  from 
cases,   the  risk  is   usually   shifted   to   some  '^f*^""*- 

^  •'  stances  over 

specialist  who  can  take  care  of  it  better  than  which  the 
he.     Insurance  companies  make  a  specialty  neur^has" 
of  taking  such  risks,  and  the   entrepreneur  °**  control, 
has    his    property    insured    against    losses    from    the 
aforementioned  causes.     In  fact,  there  are  companies 
willing  for  a  certain  premium  to  assume  loss  resulting 
from  any  future  occurrence.     An  entrepreneur  is  able 
to  have  his  goods  in  transit  insured,  and   this  shifts 
that  part  of  his  risks  to  the  insurance  com-  p. 
panics.     The  produce  brokers   through   the  shifted  to 
various  produce  exchanges  fix  prices  for  the  ^^^" 
future  delivery  of  many  staple  goods.     By  consulting 
the  financial  sections  of  the  morning  papers  the  en- 
trepreneur can  get  the  price  for  delivery  of  cotton, 
coffee,  wheat,  and  other  staples  in  any  month  of  the  year. 
Prices  for  future  delivery  are  made  only  after  care- 
ful investigation  by  experts  and  speciahsts  who  know 
the  conditions  that  affect  the  relation  between  supply 
and  demand.     This  shifts  many  risks  from  the  entre- 
preneur to  speciahsts,  but  in  the  long  run,  the  price  is 
usually  a  httle  more  than  it  later  proves  to  be,  so  some- 
thing is  paid  for  protection  against  fluctuation  in  prices. 
The  qualities  needed  to  make  an  ideal  entrepreneur 
are  so  numerous  that  few  persons  possess  all  to  a  high 


102*  "  ECONOMICS  OF  BUSINESS 

degree.      Their    relative    importance    varies  with   the 
kind  of  entrepreneur,  and  the  size  of  the  business.     One 
entrepreneur  excels  in  certain  qualities,  while 
needed  for     another  in  others.    Scarcely  any  two  owe  their 
611^^16?"^   success  to  exactly  the  same  combination  of 
neurmany     advantages.      Any   system   of    management 
*    is   directly   dependent   upon    the   employees 
for  success.     Dealing  with    theories,  ideals   and  prin- 
ciples, and  not  with  workmen,  never  results  in  an  efficient 
administration.     The  first  quality  of  an  entre- 
trainand       preneur  is  to  know  how  to  select,  train  and 
n^t®  handle  men  to  best  advantage.     No    matter 

best  ad-        ^qw  brilliant   the  methods  of    organization, 

vantage. 

or  how  great  the  personal  capacity  for  work, 
an  entrepreneur  should  be  able  to  secure  men  capable 
of  carrying  out  his  plans,  and  possess  the  art  of  holding 
the  men  in  his  service,  and  keeping  them  to  the  highest 
point  of  efficiency.  The  abihty  of  knowing  how  to 
select  the  right  men,  and  molding  them  into  a  harmonious 
whole,  is  a  most  valued  asset  of  an  entrepreneur.  In 
deaHng  with  men,  an  entrepreneur  should  be  able  to 
make  them  feel  that  they  are  not  simply  cogs  in  a  great 
machine,  but  have  important  responsibihties,  and  are 
depended  upon  as  vital  assistants  in  the  organisation. 

A  close  man-to-man  relationship  between  employer 
and  employee  is  priceless.  It  arouses  interest,  enthu- 
importance  siasm,  and  loyalty,  the  three  great  essentials 
of  the  Qf  success.     The  entrepreneur  should  be  able 

selection  ^ 

of  good  to  select  the  right  foremen  for  the  right  places, 
foremen.  ^^^  ^j^^  ^^^  ^^^  ^^j^  1^^^^  fitted  for  the  posi- 
tions, but  who  know  how  to  arouse  loyalty  with  resulting 


THE  ENTREPRENEUR  103 

cooperation  in  the  working  force.  Andrew  Carnegie 
is  perhaps  the  best  judge  of  men  in  America.  It  is 
said  that  he  never  made  a  mistake  in  his  choice  of  a 
proper  man  for  his  many  responsible  places,  and  his 
success  was  due  in  a  large  measure  to  this  ability.  The 
selecting  and  handling  of  men  is  of  much  more  signifi- 
cance to-day  than  ever  before  and  continues  to  increase 
in  importance  as  the  business  units  grow  in  size,  and  the 
individual  employee  is  further  removed  from  the  head 
of  the  organization.  Men  who  know  how  to  get  maxi- 
mum results  out  of  machines  are  common,  but  men 
who  know  how  to  get  cooperation,  and  the  greatest 
efficiency  from  the  human  element  in  industry  are  rare. 
The  latter  must  be  close  students  of  human  nature, 
and  this  is  not  common  among  entrepreneurs. 

The  entrepreneur  should  be  able  to  forecast  the  future. 
He  should  be  able  to  pick  out  business  possibilities,  and 
to  estimate  their  outcome  in  the  future.     This  jj  ^^^^ 
is  especially  true  in  all  new  ventures.     Thou-  cast  the 
sands  of  people  have  money-making  schemes, 
and  urge  their  acceptance  for  development  by  entrepre- 
neurs.   The  vast  majority  of  these  schemes  are  choose  the 
purely  visionary  as  only  a  few  possess  merit.   ^®^*^.® 
An  entrepreneur  should  be  able  to  pick  out  prove 
those    possessing    possibilities    and    develop  successful, 
them  into  business  enterprises.      He  should   carefully 
survey  the  field  of  production  and  consumption,  and 
be  able  to  forecast  the  opportunity  for  supply-  Anticipate 
ing  a  new   good  that  will  have  a  demand,  the  demand 
and  detect  any  new  methods  and  processes 
for  the  production  of  the  old  product.    An  entrepreneur 


I04  ECONOMICS  OF  BUSINESS 

should  anticipate  the  demand  for  his  goods,  and  be 
ready  to  supply  it  when  it  arises.  This  need  is  greater 
to-day  than  ever  before,  and  the  profits  of  many  an 
entrepreneur  often  depend  largely  on  his  abihty  to 
foresee  increased  demand,  and  correctly  estimate  the 
amount  necessary  to  supply  it. 

Ingenuity  and  good  judgment  are  real  forces  in  busi- 
ness. These  qualities  are  especially  needed  in  plan- 
in.  In-  ning  an  organization  and  working  out  the 
and^ood  rules,  and  methods  for  a  system  suitable  to 
judgment,  meet  the  conditions  of  a  particular  case. 
Good  judgment  is  simply  the  appUcation  of  knowledge 
gained  by  experience.  It  is  obtained  partly  by  direct 
observation  and  partly  by  data  compiled  by  others.  It 
is  absolutely  necessary  to  have  a  system  which  furnishes 
correct  and  necessary  information  of  the  various  de- 
partments of  the  business.  Good  judgment  implies 
knowledge  of  details,  understanding  of  immediate  condi- 
tions, foresight  and  decision.  A  manager  with  good 
judgment  is  valuable,  but  he  must  have  good  tools.  If 
he  does  not  possess  these,  a  man  of  less  ability,  with  better 
organization,  system  and  equipment  will  surpass  him. 

An  entrepreneur  should  be  a  specialist  in  organizing, 
systematizing  and  coordinating  the  dif- 
ize,  sys-  f erent  factors  of  a  business.  The  keynote  of 
an™*co-^  ^^^  whole  problem  of  industrial  organization 
ordinate  is  harmony.  The  manager  should  bring  each 
ent  factors  detail  of  a  business  into  close  relationship 
of  a  busi-      ^j^jj  every  other,  and  should  make  each  detail 

ness.  -^  ' 

eflScient  in  itself.      To   accomplish   this  he 
should  be  fully  acquainted  with   the  elements  which 


THE  ENTREPRENEUR  105 

combine  to  form  his  organization.    A  manager  should 
select  efl&cient  assistants,  and  distribute  the  work  among 
them  in  a   way  that   coordinates    the  many  detailed 
processes    into    one    systematic   whole.     He  Plana 
should  plan   a  system,   simple,  definite  and  gJted^to 
businesslike,  and  designed   for  his  own  spe-  Ms  case, 
cial  case.    He  should  prune  it  of  all  unnecessary  forms 
of  red  tape,  and  make  it  purely  a  means  of  making 
the    management    more    efficient.      Such    is    possible, 
when  an  entrepreneur   knows   the  condition  of   every 
branch  of  his  business,  and  is  the  master  rather  than  a 
servant  to  his  system.     Harmony  and  coordination  in 
the  work,  efficiency  and  cooperation  in  the  working  force 
test  the  ability  of  an  entrepreneur,  and  are  essentials  of 
effective  organization. 

The  entrepreneur  should  have  technical  knowledge  of 
the  methods  and  processes  of  his  undertaking.     This  is 
especially  desirable  in  every  form  of  business  y  j^^^_ 
organization.     It  is  true  that  in  a  large  cor-  nicaiknowl- 
poration,  all  the  technical  work  is  performed  the  methods 
by  salaried  assistants,  yet  to  make  an  organi-  ^^ggg^^Jf 
zation  and   a   system   efficient,    a   technical  hisunder- 
knowledge  is  absolutely  necessary.     An  en-        °^* 
trepreneur    deals    only    with    the    results    of    different 
processes  and  methods,  but  to  know  that  he  is  getting 
proper  results,  he  should  have  an  intimate  knowledge  of 
the  different  processes  of  his  business.     The  large  ma- 
jority of  our  railroad  presidents  as  well  as  many  of  our 
great  industrial   leaders  are  men  who   have   come  up 
through  the  ranks  and  are  masters  of  every  process  and 
method  of  their  particular  business  enterprise. 


io6  ECONOMICS  OF  BUSINESS 

The  entrepreneur  should  be  a  strong  and  resourceful 
leader,  a  man  of  character  and  strength,  combined  with 

VI.  strong  good  wishes  to  his  men.  He  should  be  a  prac- 
sow-cefui  ^^^^^  ^^^'  ^^^  abiHty  to  inspire  men  with 
leader.  his  own  ideas,  energy  and  abiHty.  The  en- 
trepreneur should  be  able  to  control  himself,  and  give 
a  reprimand  under  the  most  trying  circumstances  with- 
out losing  his  temper.  He  should  be  firm,  dignified  and 
always  ready  to  help  and  work  with  his  men  as  well  as 
direct  them.  He  should  be  approachable,  sympathetic, 
mingle  with  his  men,  and  take  an  interest  in  their  wel- 
fare, but  should  not  allow  familiarity,  because  it  breeds 
a  feeling  of  disrespect  towards  the  head.  He  should  be 
entirely  free  from  favoritism,  able  to  treat  every  case 
on  its  merits,  and  a  man  among  men,  a  leader  and  not 
a  driver. 

An  entrepreneur  should  have  confidence  in  himself 
and  be  able  to  inspire  confidence  in  his  organization. 

VII.  Confi-  A  thorough  knowledge  of  what  is  to  be  done, 
^®^*^®  J  confidence  in  one's  ability  to  do  it,  and  the 
ability  to  inspiring  of  that  confidence  in  the  working 
wiSdence  f^^ce  is  a  valuable  asset  to  any  man.  When 
in  others.  confidence  is  lacking  among  men,  a  .lack 
of  enthusiasm,  loyalty  and  cooperation  inevitably  fol- 
lows. Confidence  on  the  part  of  an  entrepreneur 
decides  what  can  be  done,  and  at  the  same  time 
drives  and  inspires  him  to  his  utmost  to  do  it.  Cour- 
age, resolution  and  stimulation  of  energy  and  genius, 
three  essentials  of  success,  are  all  based  on  confi- 
dence. The  whole  business  world  is  based  on  it,  and 
where  lacking,  failure  follows. 


THE  ENTREPRENEUR  107 

An  entrepreneur  should  have  ability  to  command  capi- 
tal. He  rarely  has  the  capital  necessary  to  start  a  new 
enterprise,  and  when  he  borrows,  everything  ^^^^  AbiUty 
practically  depends  on  the  conMence  of  the  to  command 
loaning  public  in  his  ability  to  make  a  success  *^*^* 
of  an  undertaking.  An  established  enterprise  frequently 
needs  capital  for  various  purposes,  and  whether  or  not  it 
is  forthcoming,  depends  largely  upon  confidence  in 
the  entrepreneur.  Many  successful  business  men  can 
obtain  any  sums  of  money  for  the  mere  asking,  without 
any  explanation  of  the  manner  of  investment,  while 
scores  of  others  cannot  raise  a  few  hundred  dollars  with- 
out safeguards  in  the  way  of  security.  The  ability  to 
inspire  confidence  in  others  so  as  to  command  their 
capital  is  a  valuable  asset  to  an  entrepreneur. 

The  people  who  undertake  the  risks  in  a  corporation 
are  the  stockholders,  but  they  take  no  active  part  in  the 
management  of  the  business,  or  in  the  superin-  g^^,,^. 
tendence  of  its  details.  The  stockholders  elect  holders  the 
a  board  of  directors  and  to  them  intrust  the 
control  of  the  enterprise.  The  directors  exercise  general 
supervision  and  determine  important  matters  of  business. 
They  do  not  give  their  whole  time  to  the  business,  but 
are  supposed  to  bring  wide  general  knowledge  and  sound 
judgment  to  bear  on  the  important  problems  of  the 
enterprise.  Salaried  managers  and  assistants  are  ap- 
pointed, and  to  them  is  left  a  large  part  of  the  man- 
agement and  the  whole  of  superintending  the  details 
of  the  enterprise.  The  risks  in  a  corporation  are  thus 
borne  by  the  stockholders,  and  the  management  is  di- 
vided among  the  directors  and  a  staff  of  salaried  officials. 


io8  ECONOMICS  OF  BUSINESS 

The  manager  of  a  small  business  enterprise  obtains  his 
details  by  personal  inspection,  and  mentally  stores  them 
The  old  for  future  use,  but  in  a  large  corporation,  the 
"e^^ng^th  executive  head  no  longer  devotes  his  time  to 
details.  minor  details.  Until  recently,  many  believed 
that  the  more  details  a  man  could  look  after,  during  the 
course  of  a  day,  the  more  he  could  accomplish.  To-day 
EUmina-  ^^^  efficient  manager  ehminates  from  his  work 
tionof  as  many  details  as  possible.     Nevertheless, 

®*  ^'  the  manager  should  know  accurately  the  actual 
conditions  of  every  department.  It  is  absolutely  neces- 
sary and  important  for  the  executive  head  to  be 
thoroughly  familiar  with  his  business,  its  needs  and  oper- 
ations. He  can  accomphsh  this  by  a  proper  series  of 
reports.    These  reports  should  be  simple  and 

Reports.  ^  .    .  ,  .  ,  .      . 

accurate,  containmg  everything  that  is  im- 
portant, and  eliminating  unnecessary  details.  An  effi- 
cient system  depends  in  a  large  measure  upon  the  heads 
of  the  various  departments.  This  emphasizes  the  im- 
The  seiec-  po^tance  of  selecting  proper  men  as  assistants, 
tion  of  They  should  be  men  who  thoroughly  imder- 

assistants.  g^^j^^  ^YieiT  work,  and  possess,  among  other 
quaHties,  the  ability  to  accurately  obtain,  and  summarize 
into  simple  reports,  the  details  necessary  for  their  chief 
to  know.  With  an  efficient  system  of  reports,  the  man- 
ager concentrates  his  work  at  his  desk,  and  has  con- 
stantly before  him  all  the  important  information 
concerning  the  business.  He  can,  without  leaving  his 
office,  keep  in  touch  with  the  workings  of  every  depart- 
ment. 
The  manager  is  the  director  of  the  broader  policies 


THE  ENTREPRENEUR  109 

and  the  larger  activities  of  an  enterprise,  and  by  de- 
voting his  time  to  details,  it  takes  away  the  opportunity 
for  this  more  important  work.  Crowd  the  -^^^^f 
brain  with  details,  and  there  is  little  room  for  too  many 
the  essential  work  of  supervision.  The  time  of 
the  manager  is  too  valuable  to  be  consumed  with  details, 
which  can  just  as  well  be  performed  by  minor  officials, 
and  time  so  spent  is  time  wasted.  Many  a  failure  is 
due  to  unwillingness  to  intrust  detail  work  to  employees. 
The  entrepreneur  of  to-day  is  the  doer  of  big  things,  and 
must,  as  far  as  possible,  devote  his  time  to  such  work. 
The  success  of  many  of  our  railroad  presidents  and  in- 
dustrial managers  is,  in  a  large  measure,  due  to  their 
keeping  in  touch  with  all  parts  of  the  business  through  an 
efficient  system  of  reports,  and  devoting  their  time  to 
the  directing  and  accompKshing  of  bigger  things. 

The  successful  manager  does  not  attempt  to  do  the 
work  of  subordinates,  but  reserves  his  abihty  for  more 
important  problems.     Furthermore,  in  a  busi-  Delegates 
ness  of  any  size,  it  is  impossible  for  one  man  ^^or-° 
to  keep  under  his  control  all  decision  and  ac-  dinates. 
tion.    It  is  a  poor  manager  who  does  not  delegate  definite 
responsibilities   to   his   subordinates.    Frequently  sub- 
ordinates become  dissatisfied  when  all  responsibility  is 
taken  away,  and  this  works  against  cooperation  and 
efficiency.    A  good  manager  gives  all  possible  weight  to 
the  opinions  of  his  subordinates,  and,  as  he  gains  con- 
fidence in  their  judgment,  leaves  many  points  entirely 
to  their  decision.     Every  entrepreneur  should  insist  that 
subordinates  follow  out  his  decisions,  as  to  methods  in 
organization,  handling  men  and  other  business  matters. 


no  ECONOMICS  OF  BUSINESS 

Every  entrepreneur  should  have  definitely  fixed  in  his 
mind  his  personal  position  in  the  organization,  and  his 
Relations  attitude  towards  the  different  members  of 
definitely  ^^  Working  force.  The  relations  of  the 
defined.  different  departments  to  each  other,  as  well 
as  the  relations  between  the  executive  head,  the  depart- 
ment heads,  and  the  subordinates,  should  be  carefully 
and  definitely  defined.  The  entrepreneur  stands  respon- 
sible for  the  success  or  failure  of  a  business,  and  for 
the  presence  of  each  one  of  his  assistants,  but  he  does 
not  assume  the  entire  responsibiHties  of  these  assistants. 
Each  assistant  has  the  same  relation  to  those  under 
him  as  his  chief  bears  to  him.  Care  should  always  be 
exercised  in  giving  orders  only  through  the  immediate 
The  giving  boss  or  Superintendent.  The  giving  of  orders 
of  orders.  ]^y  ^  superior  official  to  men  who  are  held 
responsible  to  a  lower  official  shows  bad  judgment,  and 
has  a  tendency  to  lessen  the  respect,  and  to  shake  the 
confidence  of  the  men,  in  their  own  boss. 

Authority  should  be  so  established  that  minor  breaches 
can  be  ignored  and  pass  unnoticed.  But  when  the  time 
Authority  comes  for  definite  action,  and  after  all  possible 
estabUshed.  consideration  has  been  given,  the  entrepreneur 
should  enforce  his  decisions  to  the  letter,  and  without 
mercy.  It  should  not  be  forgotten  that  the  practice  of 
showing  authority  for  authority's  sake  is  bad  and  breeds 
dissatisfaction  and  friction. 

In  every  business  enterprise,  some  form  of  discipline 
DiscipUne  is  nccessary.  Every  man  should  be  respon- 
necessary.  gible  to  some  higher  authority,  and  there  should 
never  be  any  doubt  as  to  that  authority.     Discipline 


THE   ENTREPRENEUR  m 

should  always  come  through  the  foreman.  If  a  higher 
official  wishes  to  discipline  some  workman,  it  should 
always  be  done  through  the  foreman,  or  else  the  men  will 
lose  respect  for  him.  Those  in  supervising  or  directing 
positions  should  always  maintain  their  dignity.  A 
foreman  or  boss  should  in  all  his  actions  be  a  man  among 
his  men  and  never  allow  or  countenance  any  form  of 
familiarity.  Discipline  is  then  not  difficult.  In  every 
business,  from  the  executive  chief  down  to  the  humblest 
workman,  discipline  must  be  maintained. 

An  efficient  manager  is  always  on  the  lookout  for  new 
ideas.     Information  is   the  soul  of  business  progress. 
The  business  world  presents  continually  to  Manager 
the  eyes  of  the  interested  entrepreneur  sug-  on  lookout 
gestions  and  ideas,  that  can  be  applied  to  his  and  sug- 
own  business.     Scores  of  entrepreneurs  find  it  s®^**^"^* 
profitable  to  pay  large  sums  of  money  to  their  employees 
for  suggestions.     Many  large  corporations  keep  a  special 
staff  seeking  new  processes,  ideas  and  methods  that  will 
result  in  greater  efficiency.     The  modern  business  must 
be  up-to-date,  as  the  old  way  of  doing  things  soon  be- 
comes obsolete.      New  improvements,    methods,   pro- 
cesses and  systems  often  arise  from  ideas  obtained  here 
and  there  and  changed  to  meet  the  conditions  of  an 
enterprise. 

The  efficiency  of  an  entrepreneur  is  measured  in  the 
business  world  by  his  ability  to  make  profits.  To  ac- 
complish this  goal,  every  manager  has  three  -,, 

X  itTGs  dims 

aims.  First,  he  strives  to  buy  the  factors  as  of  entre- 
cheaply  as  possible.  Labor  is  the  only  factor  p'®^®"'* 
with  which  there  is  difficulty.    The  cheapest  paid  labor  is 


112  ECONOMICS  OF  BUSINESS 

invariably  the  dearest.  The  aim  is  to  obtain  the  best 
skilled  and  the  most  efficient  labor,  and  to  properiy  reward 
it.  High  wages  and  low  costs  go  hand  in  hand.  Secondly, 
he  strives  to  coordinate  and  organize  his  factors  effectively. 
Thirdly,  he  endeavors  to  sell  his  product  at  the  highest 
possible  price.  The  nearer  he  reaches  the  fulfillment 
of  these  aims,  the  greater  are  his  chances  of  success,  and 
the  greater  his  profits. 

Every  management  seeks  efficiency,  which  is  ulti- 
mately measured  in  terms  of  the  quantity  and 
D  m  nd  Quality  of  output.  To  reach  efficiency, 
made  on  certain  demands  are  made  of  the  entrepre- 
neur^to*"  neur.  First,  he  must  get  his  work  performed 
reach  high     accurately   and   rapidly.       The   greater   the 

efficiency.  ,.     .        .  ,  „ 

ehmmation  of  unnecessary  efforts,  movements, 
and  wasted  time,  the  nearer  is  the  entrepreneur  to  his 
goal.  Secondly,  he  must  get  the  maximum  result  from 
machinery  and  equipment.  This  demands  proper  co- 
ordination, and  the  best  possible  equipped  enterprise. 
Thirdly,  he  must  get  the  maximum  output  as  well  as 
the  maximum  quality  from  his  raw  products.  Fourthly, 
he  must  market  his  goods  at  the  highest  price.  Lastly, 
he  must  see  that  improvements  in  methods  and  equip- 
ment are  introduced  in  order  to  keep  the  business 
abreast  of  the  times,  and  prevent  it  from  becoming 
obsolete. 

Management  is  the  reaching  of  a  given  end  with 
economy  of  means.  The  attempt  to  reduce  manage- 
ment to  a  compact  body  of  fixed  rules  and  principles, 
common  to  all  enterprises  would  be  foolhardiness,  yet 
there   are  certain  estabfished  methods,  practices,  and 


THE  ENTREPRENEUR  113 

well-defined  principles,  which  are  helpful  in  working  out 
the  organization  of  any  particular  enterprise.     It  was 
only  a  few  years  ago  that  business  men  ridi- 
culed the  idea  of  using  in  business  anything  ^g^^o^dg^®*^ 
which  was  taken  from  the  writings  of  others,  practices 
The    study    of    management    was    omitted  ^ies"f" 
from  the  student's  training,  and  little  litera-  service  in 

°^         ,  working  out 

ture  could  be  had  on  the  subject.  It  was  anorganiza- 
never  doubted  that  knowledge  of  manage-  ^^^' 
ment  would  be  of  great  value,  but  it  was  believed 
that  one  could  learn  to  manage  only  by  going  out 
and  watching  others  manage.  Recently,  it  was  dis- 
covered that  efficient  management  is  founded  on  laws, 
practices,  and  methods  that  could  be  taught,  and  the 
study  of  management  in  the  classroom  has  become 
possible. 

The  owner  of  capital  gets  his  interest,  the  laborer  his 
wages,  the  owner  of  land  his  rent,  but  the  man  who 
performs    the    entrepreneur's    functions    de- 
pends upon  what  is  left  for  his  remuneration. 
Whether  or  not  anything  is  left  depends  upon  the  ability 
of  the  entrepreneur  to  sell  his  product  for  a  sum  greater 
than  is  necessary  to  meet  his  expenses  of  production. 
The  difference  between  the  returns  of  an  enterprise  and 
the  total  expense  of  conducting  it  is  called  profits.     Prof- 
its, therefore,  depend  upon  the  difference  between  the  cost 
price  per  unit  of  a  good  and  its  selHng  price,  j,  ^  . , 
They  do  not  represent  any  fixed  sum,  as  condi-  resent  a 
tions  governing  them  vary  from  day  to  day. 
Every  entrepreneur  strives  for  profits,  and  his  efficiency 
as  an  entrepreneur  is  measured  in  the  business  world 


114  ECONOMICS  OF  BUSINESS 

by  his  ability  to  make  profits.  Profits  do  not  depend 
on  any  one  thing  in  particular,  but  upon  everything 
affecting  expenses,  from  the  time  raw  materials  are 
bought,  until  the  product  is  put  upon  the  market  and 
sold.  Profits  are  either  measured  for  a  unit  of  time  as 
a  month  or  a  year,  or  with  reference  to  particular  units 
of  a  good.  Sometimes  the  word  is  used  with  one  mean- 
ing and  sometimes  with  another.  It  is  not  necessary  to 
make  further  distinction,  because  in  the  long  run,  annual 
profits  are  based  upon  the  profits  on  particular  units  of 
a  good. 

A  twofold  division  may  be  made  of  profits,  —  wages  of 
management,  and  compensation  for  risk.  Wages  of 
management  are  wages  received  for  organizing, 
dMsb^nof  directing  and  supervising  an  enterprise.  In 
profits:  a  small  enterprise,  the  entrepreneur  retains 
ofmMwige-  what  is  left  after  paying  expenses  of  produc- 
ment,  ^[qj^^  ^^^  rarely  counts  as  part  of  the  expenses, 

sation  for  his  wages  of  management.  But  in  large  cor- 
"^  *  porations,  the  executive  and  managerial  work 

is  done  by  salaried  officials,  from  the  directors,  who 
usually  receive  a  stipulated  sum  per  meeting,  to  the 
Wa  es  of  low-paid  boss  of  a  gang  of  men.  Their 
manage-  salaries  are  counted  in  expenses  of  produc- 
™*^*  tion,  and  profits   are  what   are   left.     This 

only  shows  part  of  actual  profits,  and  to  obtain  the 
total,  there  should  be  added  every  dollar  paid  for  manag- 
ing and  superintending.  Entrepreneurs  of  small  enter- 
prises have  everything  at  stake,  but  in  large  corporations 
those  who  perform  the  executive  functions,  with  the 
exception  of  the  directors,  usually  have  little  financial 


THE   ENTREPRENEUR  115 

interest  in  the  enterprise.     Success  only  means  a  possible 
increase  of  salary,  and  failure,  a  loss  of  position. 

The  amount  paid  for  performing  managerial  services 
varies  from  a  small  wage  per  day  paid  to  a  gang  boss, 
to  the  princely  salary  of  a  railroad  president.  Wages  of 
or   manager   of   a   large   industrial   corpora-  ^ent  v«ut 
tion.     No  field  in  America  possesses  such  op-  ^  amount, 
portunity  for  rapid  advancement  as    the   managerial. 
There  is  an  urgent  demand  for  men  who  can  do  things, 
and  this  is  increasing  at  a  more  rapid  rate  than  the 
supply  of  properly  qualified  men.     If  a  man  possesses 
executive  ability,  his  worth  is  early  recognized  and  his 
advancement  is  rapid.     Many  large   corporations  are 
under  the  guidance  of  men  under  thirty,  who  a  few 
years  previous  started  in  humble  positions. 

Profits  should  be  sufficient  to  induce  an  entrepreneur 
to  conduct  a  business  enterprise.  Minimum  profits 
are  usually  measured  by  the  wages  an  en-  Minimum 
trepreneur  can  get  working  as  an  employee.  Profits 
Sometimes  an  entrepreneur  feels  that  the  independence 
enjoyed  in  conducting  an  enterprise  is  of  some  considera- 
tion, and  continues  as  an  entrepreneur  when  his  profits 
are  lower  than  the  wages  he  could  get  working  for  some 
one  else.  An  entrepreneur  conducting  a  business  com- 
pares his  profits  with  the  wages  that  he  might  receive 
as  an  employee,  while  the  employee  compares  his  wages 
with  the  profits  received  by  entrepreneurs  whom  he 
considers  of  his  abiHty.  The  result  of  the  comparison 
decides  whether  or  not  many  persons  remain  employees 
or  entrepreneurs. 

As  wages  vary  in  amount  from  a  yearly  remuneration 


ii6  ECONOMICS  OF  BUSINESS 

of  a  few  hundred  to  many  thousands  of  dollars,  depending 
upon  the  ability  required,  and  the  supply  and  demand 
Profits  vary  oi  men  of  that  ability,  so  profits  vary  likewise. 
in  amount,  'pj^g  annual  profits  of  a  keeper  of  a  news-stand 
amount  only  to  a  small  sum,  while  those  of  a  large  manu- 
facturer are  often  several  hundred  thousand  dollars. 
The  ability  to  conduct  a  news-stand  is  commonplace, 
and  the  risk  slight,  so  the  profits  must  necessarily  be  low, 
or  a  great  many  people  would  become  news-dealers. 
The  increase  in  the  number  of  news-dealers  lowers  profits 
and  drives  many  back  to  the  class  of  employees.  Profits 
in  this  case  cannot  be  much  above  the  minimum.  The 
skill  required  to  conduct  a  millionaire  corporation  is 
great,  and  the  risks  involved  are  also  great,  so  the  profits 
must  necessarily  be  large. 

The  second  division  of  profits  is  compensation  for  tak- 
ing the  risks  involved  in  business.  Risks  exist  in  every 
Compensa-  form  of  business,  but  vary  in  number  and  in 
risk-taMng  degree.  Compensation  for  risk-taking  varies 
varies.  from  a  small  return  where  risks  are  slight  to 

large  sums  where  they  are  hazardous.  An  entrepreneur 
rents  land,  hires  labor  and  borrows  capital  for  the  purpose 
of  producing  economic  goods  which  he  hopes  to  sell  at 
prices  greater  than  his  outlay.  With  staple  goods,  there 
is  always  a  risk  of  an  increase  in  supply,  causing  a  lower- 
ing of  price  and  possibly  a  loss.  An  entrepreneur  may, 
by  a  careful  study  of  market  conditions,  forecast  an 
increased  demand  and  prepare  to  meet  it.  If  his  forecast 
proves  correct,  he  is  rewarded  by  a  large  increase 
in  profits.  He  nevertheless  takes  the  risk  of  the  new  de- 
mand not  materializing,  and  he  would  thus  be  forced  to 


THE  ENTREPRENEUR  117 

sell  his  increased  supply  at  a  loss.    With  goods  whose 

demand  depends  on  fads  or  fashion,  risks  are  much 

greater.   The  profits  of  an  entrepreneur  depend  Always 

upon  forecasting  the  amount  necessary  to  meet  "sks  until 

goods  are 
the  demand  before  it  wanes,  but  there  is  always  actually 

the  risk  of  a  sudden  wane.  In  sending  goods  ^°^^' 
to  foreign  markets,  there  is  always  the  risk  of  oversupply. 
An  entrepreneur  working  on  contracts  always  takes  the 
risk  of  labor  troubles,  or  an  increase  in  wages,  or  prices, 
before  the  contract  is  finished.  His  profits  depend 
partly  on  luck,  and  partly  on  his  ability  to  forecast  con- 
ditions and  prices.  Risk-taking  is  one  of  the  important 
functions  of  the  entrepreneur,  and  occupies  an  important 
place  in  modern  business. 

Many  risks  against  loss  from  various  causes  are  taken 
by  specialists,  and  many  of  the  risks  of  future  buying  are 
borne  by  speculators.     Nevertheless,  it  is  true  that  in 
every  business,  there  remain  risks,  and  the  large  profits 
of  the  entrepreneur  depend  upon  them.     The  greater 
the  risks,  and  successful,  the  larger  the  profits.     The  risk- 
taker  should  study  conditions  affecting  the  production 
and  sale  of  his  product,  and  then  forecast  the  profits  de- 
future.     In  the  case  of  new  ventures,  large  guc^gg^f^ 
profits  accrue  to  the  entrepreneur  who  chooses  taking  risks, 
the  venture   which   develops   into  a   successful   enter- 
prise.     Entrepreneurs   look   for   their  greatest  profits 
from  risk-taking,  and  the  financial  success  of  many  de- 
pends upon  the   extent  of   their   success  in   ,    ^  «  n 
forecasting.     Profits  are  frequently  the  results  an  impor- 
of  pure  chance  or  luck,  and  success  is  often 
due  more  to  luck  than  to  successful  forecasting.    Luck 


ii8  ECONOMICS  OF  BUSINESS 

is  an  important  factor  in  the  success  of  many  an  entre- 
preneur, and  it  must  not  be  omitted  in  accounting  for 
many  large  profits. 

Where  risks  are  slight,  the  profits  of  an  entrepreneur 
are  not  much  greater  than  his  wages  of  management. 
Division  of     ^^^  ^^^^  ^^  increase  in  risks,  the  difference  be- 

profitsin       tween  profits  and  wages  of  management  in- 
different ^        .,    .      ,  ,  ^  ,  .  , 
business        creases,   until,  m   hazardous  ventures  which 

enterpnses.  pj-^yg  successful,  compensation  for  risk-taking 
is  by  far  the  greater  share  of  the  total  profits.  The 
profits  of  a  business  enterprise  consist  partly  of  wages 
of  management,  partly  compensation  for  risk-taking, 
and  in  certain  cases  partly  the  result  of  pure  chance  or 
luck. 

The  entrepreneur  in  the  modem  business  world  oc- 
cupies a  more  prominent  place  than  any  factor  of  business. 
The  place  '^^^  larger  the  business  unit,  the  more  impor- 
of  the  tant  is  his  function.     It  is  true  that  there  must 

neurin  be  land,  labor  and  capital,  but  they  are  of 
business.  little  consequence  without  coordination,  super- 
vision and  management.  The  entrepreneur's  task  of 
coordinating  land,  labor,  and  capital,  of  supervising  all 
their  activities,  and  of  assuming  all  responsibilities  and 
risks  of  business,  is  the  bone  and  sinew  of  every  business 
enterprise,  and  its  successful  performance  means  success. 

QUESTIONS 

1.  Why  does  the  entrepreneur  occupy  such  a  prominent 
place  in  our  industrial  system  ? 

2.  What  are  the  duties  of  the  entrepreneur?  Why  were 
they  not  necessary  during  the  handicraft  period  ? 


THE   ENTREPRENEUR  119 

3.  Name  and  explain  the  dilfferent  functions  of  the  entre- 
preneur. 

4.  In  what  way  does  the  entrepreneur  relieve  th^  pos- 
sessors of  land,  labor,  and  capital  of  the  risks  of  business  ? 

5.  What  is  forecasting  the  future  ?  Why  does  success  so 
often  depend  upon  it  ? 

6.  Name  and  explain  the  various  ways  that  business  men 
protect  themselves  against  the  uncertainties  of  the  future. 

7.  What  is  the  economic  importance  of  speculators  and  in- 
surance companies  in  our  industrial  system  ? 

8.  What  essential  qualities  should  an  entrepreneur  possess  ? 
Estimate  the  importance  of  each. 

9.  Outline  the  steps  necessary  to  take  in  deciding  whether 
or  not  a  venture  will  develop  into  a  successful  enterprise. 

10.  Why  do  enthusiasm,  loyalty,  and  cooperation  depend 
in  a  large  measure  upon  confidence?  What  is  the  r61e  of 
confidence  in  a  successful  business  ? 

11.  How  are  the  entrepreneur's  functions  performed  in  a 
corporation?  Name  the  different  classes  sharing  in  the 
functions  and  the  part  taken  by  each. 

12.  How  do  details  interfere  with  business  success?  How 
do  successful  business  men  deal  with  details  ? 

13.  Why  is  information  the  soul  of  business?  Mention 
the  different  ways  entrepreneurs  get  ideas  and  suggestions 
for  use  in  business. 

14.  How  is  the  entrepreneur  rewarded  for  his  efforts? 
Compare  the  return  for  managerial  ability  in  a  single  entre- 
preneurship  with  a  large  corporation. 

15.  Into  what  classes  may  profits  be  divided?  Comment 
upon  each  class. 


120  ECONOMICS  OF  BUSINESS 

REFERENCES 

R.  T.  Ely,  "Outlines  of  Economics,"  Ch.  XXV;  H.  R. 
Seager,  "Introduction  to  Economics,"  Chs.  VIII,  X;  F.  W. 
Taussig,  "Principles  of  Economics,"  Vol.  II,  Chs.  49-50; 
N.  G.  Pierson,  "Principles  of  Economics,"  Ch.  V;  J.  A. 
Hobson,  "The  Industrial  System,"  Ch.  VI;  E.  R.  A.  Selig- 
man,  "Principles  of  Economics,"  Ch.  XXIII;  F.  Fetter, 
"Principles  of  Economics,"  Chs.  28  to  32  (inclusive);  J.  S. 
Nicholson,  "Elements  of  Political  Economy,"  Bk.  II,  Ch. 
VIII;  A.  S.  Johnson,  "Introductory  Economics,"  Ch.  XIV; 
Chas.  Gide,  "Principles  of  Political  Economy,"  Bk.  IV,  Part 
II,  Ch.  IV;  A.  W.  Flux,  "Economic  Principles,"  Ch.  X. ; 
D.  H.  Macgregor,  "  Industrial  Combination,"  Ch.  II;  C.  L. 
Raper,  "Principles  of  Wealth  and  Welfare,"  Section  II, 
Ch.  V;  H.  J.  Davenport,  "  Value  and  Distribution,"  Ch. 
VIII;  Nearing  and  Watson,  "Economics,"  Ch.  XXIII; 
I.  Fisher,  "  Elementary  Principles  of  Economics,"  Ch. 
XXIV;  J.  B.  Clark,  "Essentials  of  Economic  Theory," 
Ch.  VII;  J.  A.  Hobson,  "The  Science  of  Wealth,"   Ch. 

vni. 


CHAPTER  VI 

ANALYSIS  OF  COST  ACCOUNTING 

A  FACTORY,  from  the  business  point  of  view,  is  operated 
for  the  purpose  of  producing  goods  for  sale.     Commenc- 
ing with  the  outlay  for  raw  materials,  there  costs  of 
is  more  or  less  expenditure  until  the  finished  production, 
product  is  ready  for  the  market.     Two  items  of  cost  enter 
directly  into  the  total  cost  of  every  manufactured  article, 
namely,  materials  and  labor.     The  other  costs  in  produc- 
tion not  charged  directly  to  any  article  are 
called  overhead  expenses.     Material  costs  in- 
clude all  outlays  for  materials  used  in  the  making  of  a 
product  entering  into  and  becoming  a  part  of  it.     Sup- 
plies, as  coal,  oil,  small  tools,  etc.,  are  necessary  overhead 
materials  in  every  factory,  but  their  cost  can-  expenses, 
not  be  charged  to  any  one  article,  so  must  be  charged  to 
overhead  expenses. 

Labor  employed  may  be  direct  or  indirect,  sometimes 
called  productive  and  non-productive.     Direct  or  pro- 
ductive labor  is  labor  employed  directly  in  j^-^^^^     ^ 
the  production  of  an  article.    All  employees  indirect 
directly  attending  machines  or  working  on  ma- 
terials belong  to  this  class.    In  every  factory,  a  great 
many  are  employed  whose  work  cannot  be  charged  to  any 
particular   article,  but  the  outlay  for  which  must  be 
charged  to  many.    These  laborers  are  called  non-produc- 

121 


122  ECONOMICS  OF  BUSINESS 

tive,  and  include  firemen,  engineers,  helpers,  superintend- 
ents, sweepers,  etc.  The  outlay  for  direct  labor  is 
charged  to  labor,  while  that  for  indirect  to  overhead 
expenses. 

Overhead  expenses  are  all  expenses  which  are  not 
charged  to  direct  labor  or  direct  materials.  They  are 
J..  . .  .  known  by  various  names,  as  indirect  costs, 
overhead       burden,  overhead  burden,  overhead  expenses, 

expenses.  ■,  .  i  i«    •  i     i    •    ^ 

and  running  expenses,  and  are  divided  into 
many  classes,  as  rent,  light,  heat,  power,  repairs,  deprecia- 
tion, insurance,  taxes,  non-productive  labor,  suppKes, 
interest,  royalties,  legal  services,  and  selling  expense. 

Materials,  labor  costs,  and  overheard  expenses  must 
be  paid  from  money  returns  before  profits  are  made. 

The  gross  income  from  any  manufacturing 
seUing  plant  consists  of  the  money  received  from  the 

Se^two^*  sale  of  goods,  and  an  entrepreneur  to  make  prof- 
chief  factors  its  must  produce  his  product  at  a  cost  less  than 

the  amount  received  for  his  goods.  Success  or 
failure  depends  on  his  ability  to  have  the  balance  on  the 
side  of  sales.  An  entrepreneur  strives  not  only  for  a 
balance,  but  to  make  this  balance  as  large  as  possible, 
because  it  is  upon  this,  that  his  position  in  the  business 
world  depends.  To  assure  a  favorable  balance,  the  clos- 
est attention  must  be  given  not  only  to  the  selling  of  the 
product,  but  to  every  stage  of  its  production.  Profits  are 
increased  by  an  increase  in  prices  with  total  costs  remain- 
ing the  same,  or  with  prices  stationary  and  a  decrease 
in  total  costs.  With  increase  in  competition  in  all  indus- 
trial lines,  and  its  resultant  influence  on  prices,  causing 
with  few  exceptions,  narrower  margins  between  selling 


ANALYSIS  OF  COST  ACCOUNTING         123 

and  cost  prices,  the  entrepreneur  was  driven  to  the  side 
of  costs  to  assure  his  profits.  Attention  was  formerly 
given  to  selling  prices,  but  at  present  it  is  directed  to 
costs.  The  entrepreneur  realizes  more  than  ever  before 
that  any  saving  in  cost,  other  things  remaining  the  same, 
means  addition  in  profits,  and  that  a  saving  in  costs  may 
more  than  offset  a  lowering  of  selling  price. 

Manufacturers  formerly  did  not  think  it  important  to 
make  any  study  of  production  costs,  and  determine  as 
nearly  as  possible  their  accuracy.     In  reality,  „   j 
in  the  majority  of  cases,  a  system  of  costs  was  of  cost 
merely  a  matter  of  guesswork.    During  the  past     ®®p"*^* 
few  years,  the  increased  effort  to  lessen  costs  has  developed 
into  almost  a  science,  in  the  study  not  only  of  total  pro- 
duction cost,  but  its  constituent  parts.     This  new  work  is 
known  as  cost  accounting,  and  is  daily  attract-  ^^^^  ^^_ 
ing  more  and  more  attention.     Cost  account-  counting,  its 
ing  is  a  system  of  records  which  enables  a  man-  °^®*°^^* 
ufacturer  to  ascertain  with  fair  accuracy  not  only  the 
production  cost  of  his  product,  but  the  constituent  ele- 
ments of  that  cost. 

Cost  accounting  has  for  its  primary  object,  the  ac- 
counting for  every  expenditure  made  during  the  different 
stages  of  production.  A  secondary  object  is  cost 
to  find  out  the  cost  of  each  item  chargeable  records, 
against  each  unit  of  the  product.  Commencing  with 
raw  material  and  following  a  good  through  the  different 
stages  until  it  is  shipped  as  a  finished  product,  cost  ac- 
counting is  carried  on  by  a  series  of  daily  rec- 

Essentials. 

ords.     Records  to  be  complete  should  deal, 

first,  with  raw  materials ;  secondly,  with  direct  labor  em- 


124  ECONOMICS  OF  BUSINESS 

ployed  during  the  different  stages  of  production ;  and, 
lastly,  with  general  expense  incidental  to  the  different 
processes  of  production. 

The  daily  records  are  obtained  by  means  of  printed 
cards.  Care  should  be  taken  that  only  the  information 
Means  of  which  is  necessary  to  ascertain  costs  is  asked 
obtaining       for.     It  is  the  work  of  a  cost  expert  to  ask 

onnation.  ^^j^  ^^^  essential  information,  and  employees 
should  be  careful  to  charge  all  expenditures  in  the  right 
places.  Frequently  the  value  of  a  record  is  partially 
destroyed  by  containing  a  mass  of  unimportant  details. 
No  fixed  rule  can  be  laid  down  as  to  what  information  the 
cards  should  call  for,  as  this  varies  not  only  in  plants 
producing  different  goods,  but  in  factories  producing  the 
same  kinds  of  goods.  This  is  left  solely  to  the  judgment 
of  the  expert.  Cards  should  be  of  a  size  suitable  for 
filing,  and  for  easy  reference.  The  value  of  a  good  sys- 
Importance  ^^^  ^^  records  rests  chiefly  in  the  facility  it 
of  a  good      provides    for    quick    and    ready    reference. 

index  and       ^_     .  .        .  . .   i  . 

filing  sys-  Nothmg  IS  SO  essential  to  a  cost  system  as  an 
*®™*  efficient   filing   and   indexing   system.    This 

in  the  past  has  been  neglected,  and  it  has  in  many 
cases  been  the  cause  of  the  failure  of  many  cost  systems. 
A  great  value  of  records  arises  from  a  scientific  study  of 
them.  This  is  made  possible  only  by  careful  fifing  and 
indexing.  Many  a  cost  system  has  been  installed,  failed, 
and  a  return  made  to  guesswork  simply  because  the 
records  were  valueless  by  not  being  properly  filed  and 
indexed. 

Expenses  should  be  divided  among  the  three  chief  items 
of  costs,  direct  materials,  direct  labor,  and  overhead  ex- 


AN.\LYSIS   OF   COST  ACCOUNTING  125 

penses.     Direct  material  is  usually  weighed,  measured 
or  counted,  and  its  value  is  easily  ascertained.     The  fac- 
tory charge  for  material  should  be  a  little  more  value  of 
than  the  invoice  price.    Care  should  be  taken  direct  ma- 

,  M      •  r  tenal 

to  include  all  outlays  until  time  of  use.  easily  as- 
Transportarion  charges  should  be  added.  The  ^^^rtained. 
keeping  of  material  on  hand  means  the  loss  of  interest 
on  the  amount  of  money  invested,  so  that  its  cost  to  the 
factory  increases  every  day  it  is  idle.  There  is  additional 
expense  for  wages,  rent  of  storeroom,  loss  through  defec- 
tive parts,  shrinkage,  and  insurance.  It  is  no  more  than 
fair  to  recognize  this  expense  by  an  increase  in  the  price 
at  which  the  material  is  charged  out  to  the  shop.  The 
cost  of  material  to  the  workmen  is  therefore  found  by 
adding  to  the  invoice  price,  transportation  charges,  and 
a  small  percentage  for  expenses  to  the  material  while  in 
storage. 

There  is  little  difficulty  in  computing  the  cost  of  direct 
labor.     Several  methods  are  in  use  for  keeping  account 
of  the  number  of  hours  of  labor  performed  Computing 
upon  a  piece  of  work.    A  simple  method  is  to  ^l^ 
have  each  workman  keep  a  daily  card,  and  on  la^or. 
it,  keep  a  record  of  the  number  of  the  job  on  which  he  had 
worked,  and  the  number  of  hours  spent  upon  it.  ,,  ^  ^ 

Method. 

A  second  method  also  widely  used,  is  to  have  the 
time  of  the  workman  marked  on  a  ticket,  which  follows 
each  job  through  the  factory.  When  finished,  the  num- 
ber of  hours  of  direct  labor  is  grouped  together  on  the 
ticket.  With  the  rate  per  hour,  and  the  number  of  hours 
of  labor,  the  labor  costs  can  easily  be  computed. 

Overhead  expense  charge  is  of  such  a  nature  that  it 


126  ECONOMICS  OF  BUSINESS 

cannot  be  assigned  directly  to  any  article.  Its  deter- 
mination and  proper  diffusion  is  the  most  difficult 
Thediflfu-  task  of  cost  accounting.  The  problem  is  to 
ovCThead  ^^^  ^^^  ^^^  amount  which  should  be  added  to 
expenses.  the  direct  cost  of  an  article  to  represent  a 
fair  share  of  the  overhead  expenses  for  that  article. 
Diffusion  of  general  expenses  is  the  great  cause  of  the 
difficulties  and  inaccuracies  that  arise  in  cost  finding. 
No  standard  Several  attempts  have  been  made  to  obtain  a 
maniSac-  uniform  system  of  cost  accounting.  In  the 
*«ring.  case  of  railroads,  gas  companies,  and  other 

public  utihty  corporations,  a  standard  system  has  been 
worked  out  and  is  proving  satisfactory.  But  manufac- 
turing enterprises  differ  so  much  in  their  operation  that 
all  attempts  at  a  standard  system  have  failed. 

Various  methods  have  been  used  for  distributing  over- 
head expenses.     The  oldest  is  based  solely  on  machin- 
ery  used.     It  provides  an  additional  charge 
of  diffu-        proportionate  to  the  interest  on  the  money  in- 
^^°^*  vested  in  machinery  and  depreciation.     There 

are  so  many  other  items  besides  interest  and  deprecia- 
„     ^  tion  that  it  is  absurd  to  make  this  the  basis 

Based  on 

machinery  of  distribution.  When  it  was  widely  used, 
"^®^*  no    pretense    was    made    to    obtain    accu- 

racy. The  method  is  inadequate  and  is  of  httle  practical 
use. 

A  second  method  is  one  extensively  used  in  Great 
The  per-  Britain.  The  basis  of  distribution  is  direct 
di^*cUabor  wages,  and  the  method  is  sometimes  called 
method.  the  percentage-to-labor.  The  percentage 
the  overhead  expense  is  of   the   total  direct  wages  is 


ANALYSIS   OF   COST   ACCOUNTING  127 

what  is  added  for  overhead  expenses.  If,  for  a  month, 
the  wages  are  one  thousand  dollars  and  the  factory  costs 
four  hundred,  the  overhead  expense  is  therefore  forty  per 
cent  of  the  wages.  To  cover  the  overhead  expense,  the 
direct  labor  charge  would  therefore  be  increased  by  forty 
per  cent.  This  method  gives  a  fairly  accurate  total 
cost,  but  it  fails  in  giving  any  satisfactory  distribution  of 
the  overhead  expense.  Everything  is  based  on  the  direct 
labor  cost,  but  overhead  expenses  do  not  bear  any  close 
relation  to  it.  They  depend  no  more  on  direct  wages 
than  they  do  on  depreciation. 

A  third  method  is  known  as  the  hourly  rate  plan.  The 
total  number  of  hours  of  work  by  all  direct  labor  for  a 
certain  period,  is  divided  into  the  total  overhead  ^j^^  ^^^^ 
expenses  for  the  same  period,  and  the  quotient  rate 
is  taken  as  the  hourly  rate  for  overhead  ex-  ™® 
penses.  If,  during  a  month,  a  factory  had  ten  thousand 
hours  of  direct  labor  and  five  thousand  dollars  of 
overhead  expenses,  the  hourly  rate  would  be  ten  thou- 
sand dollars  divided  by  five  thousand,  or  fifty  cents. 
The  rate  is  computed  at  the  end  of  each  month, 
and  is  used  for  the  succeeding  month.  For  every  hour 
of  work  on  an  article,  fifty  cents  is  added  as  its  share  of 
overhead  expenses.  If  a  factory  used  machines  of  about 
the  same  value,  the  method  would  give  a  fairly  accurate 
distribution.  But  in  the  present  complex  industrial 
system,  the  average  factory  contains  different  grades  of 
machines.  The  charging  of  the  same  rate  to  the  most 
expensive  machines  as  to  the  most  inexpensive  is  mislead- 
ing and  inaccurate. 

A  fourth  method  is  to  charge  a  rate  proportionate  to 


128  ECONOMICS  OF  BUSINESS 

the  relation  of  overhead  expenses  to  the  total  direct  costs. 
If,  in  a  factory,  the  total  direct  costs  for  a  certain  cost 
Charge  a  Period  amount  to  two  hundred  dollars,  and 
rate  pro-  the  overhead  expenses  one  hundred  dollars, 
?eiati<m  o*f  **  therefore  for  every  dollar  in  direct  cost,  fifty 
er'nsest  P^^  ^^^^  ^^  added  as  the  proper  charge  for 
total  direct  overhead  expenses.  As  in  the  former  case,  the 
*^°^*®*  cost  rate  is  fixed  at  the  end  of  the  cost  pe- 

riod, and  is  charged  for  the  succeeding  period.  This 
method  is  based  upon  the  beHef  that  all  work  done  in 
a  shop  should  bear  the  same  proportionate  share  of 
expense.  Little  criticism  can  be  made  if  all  the  goods 
produced  are  of  a  similar  nature  and  equal  in  value. 
Where  many  goods  of  different  values  are  manufactured, 
the  method  fails. 

The  sales  method  is  one  used  in  many  wholesale 
and  retail  stores.  The  distribution  of  overhead  ex- 
Saies  penses  among  the  different  departments  is 

method.  made  according  to  the  ratio  of  the  sales  of  a 
department  to  the  total  sales  of  all  departments.  If  the 
total  sales  amount  to  one  hundred  thousand  dollars  and 
those  of  the  silk  department  to  ten  thousand  dollars, 
therefore  one  tenth  of  the  total  overhead  expense  is 
charged  to  the  silk  department.  In  a  factory,  this 
method  is  unsuitable  and  is  rarely  found. 

Lastly,  the  machine  hour  is  a  method  widely  used,  and 

is  suitable  for  the  average  modem  factory.     Overhead 

„  ^.  expenses  are  divided  into  three  classes :  over- 

Machine-  ^  ... 

hour  head  factory  costs,  admmistrative  expenses, 

™®  °  '  and  selling  costs.  For  distribution  of  over- 
head factory  costs,  the  factory  is  divided  into  a  number  of 


ANALYSIS   OF   COST  ACCOUNTING  129 

departments,  or  units.     A  unit  may  consist  of  the  space 
containing  many  or  that  occupied  by  a  single  pj^gj^n  ^f 
machine.    The  latter  is  preferable,  and  accord-  overhead 
ing  to  this  division,  there  are  as  many  units  as  ®^p®^®®®* 
machines.     The  area  of  a  unit  consists  of  the  space  oc- 
cupied by  a  machine  with  sufficient  room  for  overhead 
the  materials  to  be  worked  upon,  and  the  move-  factory 
ments  of  the  workman  in  the  performance  of 
his   duties.     The   size   of    the   space   varies   with   the 
machine. 

Many  items  of  factory  costs  can  be  distributed  directly 
to  the  different  units.     This  narrowing  should  be  carried 
on  as  far  as  practicable.     There  remains  only  Distribute 
those  costs  which  are  strictly  general  in  their  Whenever 
nature,   and  which    cannot   be   assigned    to  practicable, 
any  definite  unit.      As  with  other  methods,  a  certain 
expense  period,  usually  a  month,  is  chosen.     The  rate  as- 
certained for  one  month  serves  as  the  rate  for  the  succeed- 
ing month.     In  a  factory  working  under  ordinary  condi- 
tions, the  rate  does  not  vary  very  much  from  month  to 
month.    Nevertheless,  for  each  month  the  rate  should 
be  computed  and  changed  if  necessary. 

Rent,  interest,  taxes,  insurance,  heat,  light,  power, 
depreciation,  and  repairs  are  some  of  the  items  which 
may  ordinarily  be  distributed  to  the  differ-  Overhead 
ent  machine  units.     The  rent  for  a  machine  is  dSribut^ed 
proportional  to  the  space  occupied  by  it,  as  directly, 
compared  with  the  total  floor  space  of  the  factory.     If  a 
factory  with  ten  thousand  square  feet  of  floor  space 
pays  a  monthly  rental  of  one  hundred  dollars,  the  rental 
charged  to  a  machine  occupying  a  hundred  square  feet 


I30  ECONOMICS  OF  BUSINESS 

would  be  one  dollar.     In  a  similar  way,  heat  and  light 
charges  are  distributed.     Value  rather  than  space  oc- 
cupied is   considered  in   the  distribution  of 

Methods.        .  ,    .  rr.       i 

interest,  taxes,  and  insurance.  Total  power 
expense  is  distributed  among  the  various  machines  ac- 
cording to  the  horse-power  hours  used  by  each.  The 
depreciation  of  each  machine  is  computed  separately, 
but  additional  allowance  is  made  for  the  proportionate 
share  of  the  depreciation  expense  of  the  factory  building 
in  which  the  machine  is  located.  The  monthly  deprecia- 
tion for  the  factory  buildings  is  computed,  and  is  dis- 
tributed to  the  different  machines  in  proportion  to  the 
space  occupied  by  each.  Expenses  for  repairs  are, 
wherever  possible,  charged  to  the  machine  repaired. 
Repairs  to  small  tools  are  charged  to  general  overhead 
expenses. 

It  is  customary  to  limit  the  cost  period  to  a  month, 
but  sometimes  a  longer  period  is  chosen.  Divide  the 
total  overhead  factory  costs  of  each  machine 
unit  by  the  total  number  of  working  hours  of 
each  machine  for  the  cost  period,  and  the  results  give  the 
special  hourly  burden  rates.  Add  the  remaining  items  of 
Method  for  overhead  factory  costs,  which  cannot  be  directly 
matwne-  distributed,  and  divide  by  the  total  number  of 
hour  rate,  working  hours  of  all  machines  for  the  period, 
and  the  result  is  the  supplementary  hourly  burden  rate  for 
overhead  factory  costs  not  directly  distributed.  In  any 
machine,  the  special  rate  for  the  machine,  plus  the  sup- 
plementary rate,  distributes  the  overhead  factory  costs 
in  the  form  of  an  hourly  rate  charge  for  the  use  of  the 
machine. 


ANALYSIS   OF   COST   ACCOUNTING         131 

The  diffusion  of  overhead  factory  costs  is  the  most 
difficult  task  of  the  cost  expert.  A  standard  method 
for  factories  has  not  yet  been  discovered.  The  Diffusion 
general  principles  of  one  method  may  be  used  ffcto^^*** 
in  two  factories,  but  to  meet  local  conditions,  costs, 
the  detailed  working  must  be  different.  A  successful 
method  of  distributing  overhead  factory  costs  must  be 
suited  for  the  particular  factory  where  it  is  operating. 
The  study  of  factory  conditions,  and  the  planning  of  a 
system  for  the  diffusion  of  overhead  factory  costs  is  the 
work  of  an  expert,  and  a  thoroughly  competent  person 
should  be  intrusted  with  the  task. 

Administrative  expenses  cannot  be  directly  charged, 
but  must  be  generally  diffused.  A  satisfactory  method 
is  by  a  percentage  addition  to  the  factory  Administra- 
costs.  This  is  secured  by  reducing  to  a  per-  tive  ex- 
centage  basis,  the  fraction  obtained  by  divid-  ^®"^®^* 
ing  the  whole  administrative  expense  for  the  cost  period 
by  the  total  factory  costs.  For  example,  if  ten  thousand 
dollars  were  the  factory  costs,  and  five  hundred  dollars 
the  administrative  expenses,  it  is  necessary  to  add  five 
per  cent  to  the  factory  costs  to  cover  administrative 
expenses. 

SelHng  expenses  include  all  expenses  incidental  to  the 
selHng  of  a  product.     The  distribution  is  based  on  the 
value  of  the  product  sold.     Each  article  sold  Distnbu- 
should  bear  its  proportion  of  the  selling  cost.  ^^^°^  ^^_ 
The  best  practice  is  to  distribute  the  selling  penses. 
expense  by  a  flat  rate  based  on  the  total  selling  expense, 
as  compared  with  the  total  value  of  the  goods  sold.     If 
ten  thousand  dollars  equal  the  total  seUing  expense,  and 


132  ECONOMICS  OF  BUSINESS 

two  hundred  thousand  dollars  the  value  of  the  goods 
sold,  five  per  cent  is  added  to  the  sum  of  the  factory  costs 
and  administrative  expenses  to  cover  selling  expenses. 
The  total  cost  of  a  manufactured  article  would  be  the 
direct  material  cost  plus  the  direct  labor  cost,  plus  the 
overhead  factory  expense,  computed  by  multiplying 
the  number  of  hours  of  machine  labor  by  the  sum  of 
the  special  and  supplementary  hourly  rates  plus  the  per- 
centage for  administrative  expenses,  and  to  this  gross, 
the  percentage  for  selling  expenses.  For  example,  if  the 
direct  material  used  costs  five  dollars,  and  direct  labor 
ten  dollars,  the  number  of  machine  hours  twenty,  special 
hourly  rate  fifty  cents,  and  supplementary  rate  twenty- 
five  cents,  administrative  expenses  ten  per  cent,  and  sell- 
ing cost  five  per  cent,  the  total  cost  of  the  article  would 
be  five  dollars  plus  ten  dollars  plus  fifteen  dollars, 
which  equals  thirty  dollars,  plus  three  dollars  equals 
thirty-three  dollars,  plus  one  dollar  and  sixty-five  cents 
equals  thirty-four  dollars  and  sixty-five  cents. 

The  principles  of  cost  accounting,  generally  speaking, 
are  the  same  for  all   manufacturing   plants,   but   the 

method  of  application  differs  according  to 
system  factory  conditions.     A  successful  system  must 

developed  ^^  developed  for  each  factory,  and  specifically 
for  each        adapted  to  meet  local  conditions.    A  thorough 

understanding  of  the  general  principles  of  cost 
accounting  and  a  careful  knowledge  of  local  conditions  are 
necessary  for  the  planning  of  a  successful  system.  Fullest 
consideration  must  be  given  to  the  existing  state  of 
affairs,  nature  of  the  product,  method  of  production  and 
size  of  plant.     These  details  vary  in  different  plants, 


ANALYSIS  OF  COST  ACCOUNTING         133 

and  to  meet  these,  proves  the  ability  of  the  cost  expert. 
No  general  rigid  system  can  be  given,  but  it  must  in 
every  instance  be  a  product  of  the  particular  plant. 

Bookkeeping  is  the  process  of  recording  business  trans- 
actions for  the  purpose  of  showing  debits  and  credits. 
It  is  simply  a  clerical  function.     Cost  keep-  bq^jj. 
ing  has,  on  the  other  hand,  to  do  with  find-  keeping 
ing  imit  costs.     It  is  concerned  in  placing  Costac- 
in  the  most  direct  way,  the  cost  of  every  ele-  <^<»"^*i^e- 
ment  that  goes  to  make  the   total  cost  of  a  product. 
Bookkeeping  begins  where  cost  keeping  leaves  off.     Cost 
keeping  was  developed  by  factory  experts  and  not  by 
accountants.     Expert  accountants  have  no  knowledge 
of  actual  factory  conditions.     They  are  only  concerned 
with  accounts,  and  do  not  know  what  will  reduce  costs 
in  a  factory,  or  what  system  of  cost  keeping  will  prove 
most  effectual.     Accountancy  and  a   careful  training 
in  factory  conditions  and  operations  are  essential  to  the 
successful  and  efficient  cost  expert. 

In  this  age  of  small  margins,  it  is  necessary  for  a  manu- 
facturer to  know  as  nearly  as  possible,  in  dollars  and 
cents,  the  accurate  cost  of  every  step  that  he  success 
takes,  and   every  unit  of   product    that   he  often  de- 

j  rr^A       e  i  •  •  i       pends  upon 

produces.  Ihe  factory  makmg  money  with-  guesswork 
out  such  knowledge  is  depending  entirely  upon  ^^  ^^^^' 
the  good  judgment  of  the  manager  and  luck.  Its  suc- 
cess depends  more  or  less  upon  good  guessing.  Safety 
Hes  only  in  a  large  margin  between  costs  and  selling 
prices.  If  total  and  constituent  costs  are  furnished,  how 
much  better  can  good  judgment  be  appHed,  and  how 
much  greater  is  the  assurance  and  guarantee  of  success. 


134  ECONOMICS  OF  BUSINESS 

Every  manufacturer  should  know  the  conditions 
existing  in  every  part  of  his  factory.  This  can  be  se- 
Cost  ac-  cured  by  means  of  accurate  cost  accounting. 
assi^S^fn  ^  carefully  devised  cost  system  readily  gives, 
many  ways,  in  detail,  the  working  conditions  in  all  parts  of 
a  plant.  It  shows,  if  direct  materials  are  being  economi- 
cally used,  and  if  the  proper  amount  of  finished  product 
of  the  desired  quaUty,  is  obtained.  If  the  proper  amount 
is  not  secured,  it  points  out  where  to  investigate,  to 
discover  the  cause  of  the  discrepancy.  Frequently,  a 
change  in  methods  or  machines  greatly  increases  the  out- 
put, and  saves  thousands  of  dollars.  The  accurate 
account  kept  of  productive  workers  tells  not  only  the 
exact  amount  but  the  kind  of  work  that  each  is  doing. 
Loafing  and  padding  of  accounts  are  prevented.  The 
management  knows  at  all  times  the  efficiency  of  each 
productive  employee. 

A  cost  system  is  most  helpful  in  giving  accurate 
knowledge  of  the  constituent  elements  of  overhead  ex- 
Providesa  P^^^ses.  A  record  is  obtained  of  the  use  of 
check  on  supplies  and  repairs,  and  provides  a  check 
on  wasteful  use,  and  lack  of  proper  care  in 
operating  machinery. 

In  a  factory,  the  proper  results  of  a  good  cost  system 
demand  more  than  to  know  how  to  get  the  expense 
Howtoob-  figures.  A  manufacturer  should  know  what 
tain  proper  the  proper  expense  figures  should  be,  and  how 
from  a  cost  to  cut  excessive  costs,  without  interrupting 
system.  production  or  sacrificing  quality.  He  should 
strive  to  learn  if  he  is  getting  the  greatest  output,  the 
highest  quahty,  and  the  best  service  from  materials, 


ANALYSIS  OF  COST  ACCOUNTING         135 

machines,  and  men.  A  good  cost  system  tells  him  that, 
but  it  is  of  little  service,  unless  it  is  carefully  studied, 
and  made  the  basis  for  investigation  to  discover  where 
it  is  possible  to  prune  costs,  improve  labor  and  factory 
conditions  in  order  to  obtain  the  greatest  efhciency  from 
materials,  plant,  and  labor.  This  presupposes,  that 
careful  investigation  is  made,  and  correct  costs  for  the 
different  stages  of  production  ascertained.  When  this 
is  done,  the  cost  system  proves  of  the  greatest  possible 
service  for  making  a  comparison  of  actual  costs  with 
what  the  costs  should  be,  and  shows,  exactly,  where  costs 
can  be  pruned. 

Profits  depend  entirely  on  the  existence  of  a  margin 
between  the  cost  of  an  article  and  the  price  obtained 
in   the  market.     Financial   success   depends  ^^ 

^  The  assist- 

upon  the  presence  of  such  a  margin.     A  man-  ance  of 
ager,  unless  he  possess  a  monopoly,  does  not  countkig  in 
fix  prices  for  his  commodity.     He  has  con-  price 
trol  only  over  the  cost  of  producing  it.     To 
know  whether  or  not  a  profit  exists,  at  the  selling  price, 
is  of  the  greatest  importance  to  a  manufacturer.     The 
greater  accuracy,  he  can  obtain  as  to  the  difference,  the 
better  is  he  prepared  to  safeguard  against  losses.     A  cost 
system  not   only  gives  a  manufacturer  the    difference 
or  margin  between  costs  and  selling  prices,  but  the  exact 
amount  of  the  difference.     He  is  not  in  ignorance,  as  to 
whether  or  not,  he  is  making   profits,  and  he  knows, 
every  day,  exactly  what  he  is  doing.     Many  a  manufac- 
turer with  his  old-fashioned,  chance  method  knows  only 
the  state  of  his  business,  when  the  annual  inventory  is 
taken,  and  then  there  is  always  a  doubt  as  to  its  accuracy. 


136  ECONOMICS  OF  BUSINESS 

If  producing  dififerent  lines  of  goods,  if  it  is  expedient 
to  cut  the  price  of  one,  a  manufacturer  knows  how  far 
cutting  is  possible,  without  bringing  loss  that  might  em- 
barrass his  business.  With  price  reductions  due  to 
keen  competition,  many  a  manufacturer  has  been 
able  to  continue  his  business  at  a  profit  by  reducing  his 
costs. 

A  manufacturer  with  a  good  cost  system  knows  what 
he  can  do  in  price  making,  and  at  the  same  time,  knows 
Cost  sys-  ^^  ^^^  goods  are  produced  at  the  least  possible 
tern  often  cost.  Knowledge  takes  the  place  of  guesswork 
ruinous  and  ignorance.  A  man  knows  how  far  price 
competition,  ^^tting  Can  be  carried  without  bringing  ruin, 
and  ruinous  competition  is  prevented.  Many  a  manu- 
facturer has  even  to-day  been  heard  to  remark,  that  he 
could  not  at  present  tell,  what  effect  the  cutting  of  prices 
would  have  upon  his  business,  and  would  be  compelled 
to  wait  for  results.  It  places  such  a  manufacturer  at  a 
disadvantage,  when  competing  with  a  man  who  knows 
his  costs.  Steamboats,  freight  cars,  locomotives,  etc., 
are  usually  made  according  to  specified  contract,  and 
before  contracts  are  given,  bids  are  asked  for  the  making. 
In  making  estimates,  a  knowledge  of  costs  is  necessary. 
A  manufacturer  knowing  his  costs  can,  under  normal 
conditions,  safely  make  his  price,  and  is  at  a  decided 
advantage  over  the  man  who  depends  alone  upon  his 
judgment.  There  is  no  manufacturer  who  can  afford 
to  conduct  his  business  without  a  reliable  cost  system, 
and  it  is  one  of  the  most  valuable  assets  in  business. 

A  cost  system  when  introduced  is  often  a  failure,  and 
all  cost  systems  are  then  branded  as  useless.    The  cause 


ANALYSIS   OF   COST  ACCOUNTING  137 

of  failure  is  either  due  to  weakness  in  the  system,  or  in- 
competency of  clerks  after  introduction.  Carein 
For  introduction,  a  man  should  be  sought  0^^*03^^°^ 
who  knows  cost-keeping  principles,  is  able  to  system, 
analyze  carefully  local  conditions,  and  devise  proper 
records  for  obtaining  necessary  information.  An  expert 
accountant  unless  he  has  also  had  shop  experience  should 
be  avoided.  Make  sure,  that  you  have  formulated  the 
best  system  possible  for  your  factory  conditions,  and 
place  in  charge  competent  clerks.  Incompetency  spoils 
any  system.  Engage  a  competent  person  to  devise  a 
proper  filing  and  indexing  system  for  the  cost  records, 
and  place  it  under  the  charge  of  a  competent  clerk. 
This  is  the  weak  spot  in  many  cost  systems.  Remember 
that  a  good  system  cannot  take  the  place  of  poor  man- 
agement, and  to  get  the  best  results,  efficient  manage- 
ment must  accompany  an  accurate  cost  system.  With 
care  in  installation,  and  a  competent  person  in  charge,  a 
cost  system  will  prove  of  valuable  service  to  every  manu- 
facturer. 

Cost  systems  have  been  studied  with  reference  to 
public  utilities  and  manufacturing  plants.  Greater  prog- 
ress towards  imiform  system  has  been  made  in  the 
former  than  in  the  latter  case.  At  present,  the  task  of 
obtaining  a  uniform  system  for  factories  seems  insolvable, 
due  to  the  fact,  that  no  two  factories  possess  the  same 
local  conditions.  Little  has  been  done  towards  extend- 
ing the  system  to  mercantile  establishments.  A  cost 
system  suitable  to  the  wholesale  or  retail  store  can  easily 
be  devised,  and  would  prove  of  valuable  service  in  find- 
ing leaks  and  wastes,  and  assist  in  reducing  expenses. 


138  ECONOMICS  OF  BUSINESS 

QUESTIONS 

1.  Costs  of  production  maybe  divided  into  what  different 
classes  ?  What  is  the  difference  between  direct  and  indirect 
costs  ? 

2.  What  is  cost  accounting  ?    Trace  its  evolution. 

3.  What  are  the  essentials  of  good  cost  records? 

4.  Outline  a  good  indexing  and  filing  system.  What  is 
its  importance  ? 

5.  How  is  the  value  of  direct  materials  obtained?  Why 
should  materials  be  charged  to  factory  at  a  slight  increase  over 
invoice  price  ? 

6.  Outline  a  method  for  computing  direct  labor  costs. 

7.  Outline  four  methods  of  diffusion  of  overhead  expenses 
and  criticize  each.  Outline  the  machine-hour  method  for 
diffusion  of  overhead  factory  costs. 

8.  What  is  a  cost  period  ?   Why  is  a  month  usually  chosen  ? 

9.  What  are  administration  expenses  ?  Outline  a  practi- 
cal method  for  their  diffusion. 

10.  What  are  selling  expenses  ?  Outline  a  practical  method 
for  their  diffusion. 

11.  What  local  factory  conditions  must  be  studied  in 
working  out  a  cost  system? 

12.  What  is  the  difference  between  bookkeeping  and  cost 
accounting  ?    What  are  the  prerequisites  for  cost  accounting  ? 

13.  What  must  be  done  to  obtain  the  best  results  from  a 
cost  system? 

14.  Mention  the  different  ways  in  which  a  good  cost  sys- 
tem assists  an  entrepreneur. 

15.  What  precautions  must  be  taken  in  the  installation 
of  a  cost  system  ?  Give  reasons  for  the  failure  of  many  sys- 
tems. 


ANALYSIS  OF  COST  ACCOUNTING         139 

REFERENCES 

H.  A.  Evans,  *'Cost  Keeping  and  Scientific  Management," 
Chs.  I-VII,  inc. ;  F.  E.  Webner,  "Factory  Costs,"  Chs.  XIX- 
XXVII,  inc. ;  J.  R.  Wildman,  "Cost  Accounting";  H. 
Emerson,  "Efficiency,"  Ch.  VII;  J.  L.  Nicholson,  "Nichol- 
son on  Factory  Organization  and  Costs,"  Chs.  Ill,  IV; 
S.  H.  Bunnell,  "Cost  Keeping  for  Manufacturing  Plants"; 
A.  H.  Church,  "The  Proper  Distribution  of  Expense  Bur- 
den" ;  A.  H.  Church,  "Production  Factors  in  Cost  Account- 
ing and  Works  Management";  A.  C.  Ridgway,  "Cost 
Accounts" ;  Garcke  and  Fells,  "Factory  Accounts"  ;  "  Busi- 
ness Administration,"  edited  by  W.  D.  Moody,  Vol.  IX ; 
W.  C.  Redfield,  "The  New  Industrial  Day,"  Chs.  II, 
IV,  V  ;   W.  Strachan,  "  Cost  Accounts." 


CHAPTER  VII 

FACTORY  EFFICIENCY 

Capital  assisted  by  invention  has  been  the  cause  of 
many  changes  in  the  factory.  No  method,  no  system, 
Attention  guesswork  as  to  costs,  all  show  the  crude  form 
directed  to     of  early  factory  management.     With  an  abun- 

the  study  ''  •     ,      , 

of  factory  dancc  01  Capital,  the  small  factory  grew  mto 
conditions,  ^j^^  gigantic  plant.  The  entrance  into  larger 
markets  made  competition  keener,  and  the  manufac- 
turers were  driven  to  devise  means  of  putting  their 
goods  on  the  market  at  lower  costs.  In  search  for  cost 
reduction,  it  was  not  long  before  the  factory  received 
attention,  and  its  careful  study  has  proven  a  most  fruit- 
ful field.  Method,  system,  and  knowledge  are  gradually 
taking  the  place  of  chaos  and  guesswork.  Many  general 
principles  and  much  knowledge  underlying  the  conducting, 
and  the  operation  of  a  factory  have  been  made  accessible: 
The  expressing  of  these  principles  into  simple  language, 
so  that  they  will  be  easily  understood,  and  of  service  to 
the  average  student,  is  the  task  undertaken  by  the  writer. 
The  problem  of  factory  location  is  a  very  important 
one  in  every  branch  of  manufacturing.  A  good  location 
Factory  IS  a  valuable  asset  to  any  factory.  A  well- 
location,  equipped  and  properly  managed  plant  may 
fail  in  a  poor  location,  while  the  existence  of  a  badly 
managed  concern  may  depend  upon  its  favorable  loca- 
tion.    Several  important  factors  have  a  bearing  upon 

140 


FACTORY  EFFICIENCY  141 

factory  location.     The  possession  of  one  or  more  of 
these  has  turned  many  an  obscure  country  village  into 
a  large  manufacturing  city.     The  necessary  factors  in 
each  instance  depend  upon  the  character  of  the  article 
manufactured.     Sometimes  one  factor  and  sometimes 
another  is  the  one,  that  should  be  carefully  studied  in 
choosing  a  place  best  suited  for  a  particular  manufac- 
turing plant.     The  chief  factors  affecting  lo-  chief 
cation  are  as  follows :  market  for  sale  of  the  affecting 
product;    suitable    transportation  facilities;  location, 
nearness   to  raw  materials;  power   facilities   and   fuel 
supply;  available  labor  supply;  favorable  climatic  con- 
ditions; suitable  water  supply;  available  capital;  and 
local  advantages  and  disadvantages. 

Every  factory  in  order  to  exist  must  dispose  of  its 
product.     Goods  must  be  sold  as  well  as  produced,  and 
the  one  is  just  as  essential  as  the  other.     Par-  Market  for 
ticular  attention  must  be  paid  to  the  available  Product, 
market  for  the  product.     Factories  are  frequently  located 
near  large  consuming  markets.    This  explains  the  great 
iron  and  steel  industries  in  IlHnois,  the  selection  of  the 
site  of  Gary,  and  the  location  of  large  farm  implement 
factories  in  Chicago.     Nearness  to  the  con-  ^dvan- 
suming  market  has  the  advantage  of  giving  tages  of 

.  r      .  .  r   M       nearness 

the  manufacturer  an  opportunity  to  carefully  to  consum- 
study  the  needs  of  the  consumer,  and  give  ^^&^"^^^' 
him  the  particular  grade  or  style  that  he  wishes.  A 
little  change  in  the  grade,  form,  or  style  of  goods,  which 
better  appeals  to  the  consuming  public,  frequently 
gives  a  producer  a  decided  advantage  over  a  competitor 
in  the  market.     Great  distributing  centers  where  busi- 


142  ECONOMICS  OF  BUSINESS 

ness  men  meet  prove  good  markets,  and  frequently  are 
thriving  manufacturing  cities.  IndianapoKs,  Kansas 
City,  and  St.  Louis  are  good  examples. 

Nearness  to  the  supply  of  raw  materials  is  an  important 
consideration  in  location.  This  is  particularly  true  if 
Nearness  the  raw  material  is  bulky,  and  of  comparatively 
Sraw*^^  low  cost,  or  where  the  cost  of  transportation 
materials,  is  high.  The  cost  of  transporting  a  long  dis- 
tance would,  in  the  case  of  many  articles,  add  so  much 
to  the  cost  of  production,  that  their  manufacture  would 
be  unprofitable.  Nearness  to  the  great  live-stock  belt, 
accounts  for  the  location  of  the  large  packing  houses  in 
Chicago,  Kansas  City,  and  Omaha.  Iron  and  coal 
deposits  in  Alabama  are  making  that  state  a  great  iron 
and  steel  manufacturing  center.  Flour  mills  are  usually 
located  near  wheat  belts,  as  in  the  case  of  the  great 
milling  centers  of  Portland  (Oregon)  and  Minneapolis. 
The  great  pulp  mills  are  situated  near  spruce  and  poplar 
forests.  Pottery,  tiling,  and  brick  industries  are  located 
near  their  respective  grades  of  clay.  When  raw  material 
is  only  a  small  item  in  the  expense  of  production,  loca- 
tion is  not  an  important  factor,  as  in  the  case  of  steel,  in 
the  making  of  firearms  and  cutlery.  The  importance  of 
nearness  to  raw  material  depends  upon  the  proportion 
it  is  of  the  total  expenses  of  production. 

Every  factory  producing  goods  more  or  less  bulky, 
and  of  relatively  low  price,  must  have  cheap  and  adequate 
outlet  for  suppHes  as  well  as  for  finished  goods, 
tation  Good  facilities  for   transportation,  and   low 

ac  ties.       freight  rates  are,  with  many  factories,  very  im- 
portant considerations.    In  some  cases,  the  matter  of  a 


FACTORY  EFFICIENCY  143 

few  cents  a  ton  in  transportation  means  success  or  failure. 
An  ideal  center  would  be  where  railroads  and  waterways 
meet,  as  with  Detroit,  Buffalo,  and  Chicago.  Manu- 
facturers of  bulky  articles  usually  locate  near  waterways, 
so  as  to  take  advantage  of  low  water  rates.  The  possi- 
bility of  obtaining  private  railway  sidings  is  important, 
as  it  not  only  saves  cartage,  but  often  enables  the  manu- 
facturer to  load  and  pack  his  goods  more  carefully,  and 
allows,  with  heavy  goods,  the  use  of  special  cranes  which 
are  not  found  at  a  station. 

Proximity  to  power  agents,  as  waterfalls,  coal,   or 
natural  gas,  is  an  essential  factor  with  most  factories. 
To  obtain  cheap  power  caused  the  early  group-  ^  ^^^ 
ing  of  factories  around  waterfalls,  and  accounts  to  power 
for  the  early  impetus  given  to  manufacturing  in  *^^°  ^* 
New  England.     Many  a  New  England  town  owes  its 
existence  and  growth  to  its  waterfall.    As  a 
result  of  the  use  of  water  to  generate  elec- 
tricity, a  new  interest  has  been  taken  in  water  power. 
Many  plants  have  been  erected  at  Niagara  Falls,  or  in 
the  vicinity,  to  take  advantage  of  the  cheap  electric 
power  generated  by  the  use  of  the  great  cataract.     Where 
water  is  not  used  directly  or  indirectly  for  power,  fuel 
becomes  an  important  item.     It  is  so  important  that  it 
is  often  advisable  to  take  the  raw  material  to  the  coal 

fields  to  be  manufactured.     To  be  near  an 

Fuel, 
abundant  fuel  supply,  accounts  for  the  many 

factories   centering   around   Pittsburg,    and    the   rapid 

development  of  manufacturing  in  Illinois  and  Ohio. 

A  natural  gas  supply  is  more  important  than  coal 

because  it  furnishes  a  cheaper  fuel.     Towns  and  cities 


144  ECONOMICS  OF  BUSINESS 

with  an  abundant  supply  use  the  fact  as  the  greatest 
„       ,         inducement  to  offer  manufacturers  seeking  a 

Natural  gas.    .....  ° 

location  for  factories.     Power  is  an  important 

cost  item  in   every  factory.     Manufacturers   seeking  a 

new  location  should  make  careful  study  of  the 
Power  cost.  -^ 

sources  of  power  and  its  cost.     A  favorable 

location  may  cause  a  sufl&cient  saving  in  power  cost  to 

assure  the  financial  success  of  an  undertaking.     During 

the  past   decade,  many  manufacturers    have  found  it 

profitable  to  move  their  factories  to  power  centers. 

The  character  of  labor  varies  in  different  factories. 
Some  factories  give  steady  employment  to  both  skilled 
Labor  and  unskilled  labor,  while  others  frequently 

supply.  require  a  large  amount  of  unskilled  at  short 

notice.  In  the  latter  case,  it  is  absolutely  necessary  to 
be  near  a  large  city  in  order  to  draw  from  its  large  classes 
of  unskilled  labor.  Frequently  a  particular  kind  of 
skilled  labor  needed  is  not  found  in  the  city  where  loca- 
tion seems  desirable.  Investigation  should  be  made 
to  see  if  such  labor  in  sufficient  numbers  can  be  obtained. 
Laborers  are  attracted  to  cities,  and  desire  to  live  among 
members  of  their  own  race,  or  members  of  the  same  trade. 
A  manufacturer  may  choose  a  small  town  as  a  desirable 
location  for  a  silk  mill,  but  the  question  arises,  can  he 
obtain  a  sufficient  number  of  silk  workers  to  run  the  mill  ? 
If  distant  from  a  large  city,  the  task  is  Hkely  to  be  a 
serious  one,  and  failure  may  result  from  lack  of  workmen. 
In  every  instance,  close  attention  must  be  given  to  the 
character  of  labor,  and  the  possibility  of  getting  sufficient 
numbers  to  meet  the  demands  of  the  factory. 

Questions  other  than  the  supply  of  labor  need  con- 


FACTORY   EFFICIENCY  145 

sideration.     If  the  location  is  a  large  city,  what  is  the  ac- 
tivity of  the  trade-unions  among  the  required  ^^.^jyity  ^f 
classes  of  labor,  is  a  question,  that  needs  careful  trade 
consideration.     Trade-unions  in  many  cities 
have  become  so  arbitrary  in  their  methods,  as  to  cause 
constant    friction   between   employers   and   employees. 
This  friction  prevents  efficient  work,  and  greatly  in- 
creases the    costs  of    production.     Trade-union    inter- 
ference drove  the  Allis-Chalmers  Company,  as  well  as 
many   other    manufacturing   firms,    from    the   city   of 
Chicago. 

If  labor  can  be  obtained  in  a  small  town,  it  has  many 
advantages  over  a  city.     Labor  in  cities  is  more  or  less  of 
a  transient  nature,  which  makes  it  difficult  to   g^^^^  ^ 
build  up  a  permanent  force.    Wages  are  usually         vs. 
lower  in  small  places,  and  the  laborers  more  "  ^  *  °'* 
contented.     Labor  trouble  is  slight,  as  small  towns  do 
not  give  inducements  to  attract  the  attention  of  labor 
agitators.     It  is  sometimes  impossible  to  get  suitable  and 
reasonable  living  quarters  in  a  small  place  for  a  large 
force.     Many  companies  have  been  compelled  to  build 
homes  for  their  men,  and  have  found  it  in  several  ways 
a  paying  investment.     There  are  several  in-  Factory 
stances,  where  companies  have  even  built  towns  t^^^^. 
for  their  working  force,  as  the  Pullman  Company  and 
the  Maryland  Steel  Company  in  America,  and  Cadbury 
Brothers  and  Lever  Brothers  in  England. 

During  recent  years,  many  large  manufacturing  firms 
have  moved  their  factories  from  large  cities  to  small  coun- 
try towns.  With  factory  buildings  bright  and  cheery, 
surrounded  by  pretty  flowers  and  well-kept  lawns,  with 


146  ECONOMICS  OF  BUSINESS 

cozy  and  comfortable  homes  for  the  working  force, 
Advantages  ^^^^  ^^  ^  greater  inducement  to  the  best 
of  factory  skilled  laborer,  and  to  insuring  his  perma- 
^^^^'  nency  ?    With  peace  of  mind  and  contentment 

in  the  working  force,  what  are  better  weapons  to  ward  off 
trouble  from  the  interference  of  labor  agitators  ?  Many 
have  tried  the  experiment,  and  not  a  single  failure  has 
resulted.  The  plan  is  worthy  of  consideration  by  every 
manufacturer  seeking  a  location  for  a  factory,  and  who 
is  anxious  to  secure  an  efficient,  contented,  and  per- 
manent labor  force. 

Favorable  cHmatic  conditions  are  important  considera- 
tions in  the  manufacture  of  many  products .  Laborers  can 
Climatic  work  more  effectively,  when  the  summers  are 
conditions,  j^^^  ^^^  j^q^.^  ^^^  ^^ie  winters  too  cold.  Either 
extreme  interferes  with  the  efficiency  of  workers.  Ex- 
cessive summer  heat  is  a  handicap  to  the  iron  industry 
in  Alabama,  and  the  extreme  winter  cold  makes  the 
manufacturing  of  many  products  unprofitable  in  Winni- 
peg, Canada.  Cotton  spinning  requires,  during  the 
operation,  considerable  moisture  in  the  air.  If  this  is 
not  obtained  by  the  humid  condition  of  the  atmosphere, 
steam  must  be  forced  through  the  spinning  rooms. 
Favorable  humidity  conditions  have  made  Fall  River 
and  New  Bedford  great  cotton  manufacturing  centers. 
On  the  contrary,  moisture  impairs  the  flavor  of  the  cured 
tobacco  leaf.  Egypt,  possessing  a  dry  climate,  has  be- 
come an  important  manufacturing  center  for  high-grade 
cigars  and  cigarettes. 

More  or  less  water  is  needed  in  every  factory,  but  in 
some  industries,  Uke  paper  manufacturing,  water  is  a 


FACTORY  EFFICIENCY  147 

very  important  factor.    If  the  desired  location  is  not 
near  a  body  of    fresh    water,   investigation  ^^^^^ 
should  be  made  to  make  certain  that   suffi-  supply 
cient   water   is    available   to   meet    factory  ^^^°  ^' 
demands. 

It  is  frequently  necessary  to  rely  on  financiers  and 
the  investing  public,  for  the  greater  part  of  the  capital 
required  to  conduct  a  manufacturing  enter-  AvaUabUity 
prise.  The  availability  of  capital,  it  can-  ofc&pitai. 
not  be  denied,  depends  largely  upon  the  known  ability 
of  the  entrepreneur  at  the  head  of  the  concern,  but  in 
many  cases,  location  nevertheless  plays  its  part.  Men 
investing  large  sums  of  money  in  manufacturing  plants, 
like  to  have  the  enterprises  within  such  a  distance,  that 
inspections  can  occasionally  be  made  to  satisfy  them- 
selves that  the  plants  are  being  efficiently  operated. 
Many  even  refuse  to  loan  money  on  ventures  in  distant 
or  remote  places.  When  a  manufacturing  company  must 
rely  largely  upon  borrowed  capital,  it  is  often  very 
desirable  to  find  a  suitable  location,  in  or  near  some 
large  town  or  city,  where  this  capital  can  be  easily  se- 
cured. Many  a  manufacturing  company  not  widely 
known,  and  located  in  some  distant  town,  finds  great 
difficulty  in  obtaining  capital.  The  question  of  capital 
is  an  important  one,  and  the  degree  of  rehance  on  the 
public,  decides  its  importance  in  the  location  of  factory. 

Local  conditions  and  requirements  must  be  carefully  in- 
vestigated.    Except  in  large  cities,  land  cost  is  j^^^^  ^^^^ 
seldom  a  deciding  factor.    Some  manufacturing  in  small 
towns  give  away  land  sites,  some  grant  exemp- 
tion from  taxation  for  a  term  of  years,  and  some  add  a 


148  ECONOMICS  OF  BUSINESS 

bonus  as  inducements  for  the  location  of  new  manufac- 
Land  cost  during  plants.  Nevertheless,  in  large  cities,  the 
in  large  question  of  land  costs,  assessments,  and  taxes 
requires  careful  consideration.  Many  manu- 
facturing firms  find  it  advantageous  to  locate  in  the  sub- 
Advantages  ^^^^  ^^  ^  ^^^y*  '^^^  advantages  arising  from 
of  suburb      water  supply,  fire  and  police  protection,  and 

location.  ,  ft-  jy  ^  ,       .. 

lower  msurance  rates  make  it  very  necessary 
that  the  location  be  within  the  city  hmits.  Location  is 
real  capital,  and  has  an  important  bearing  on  the  future 
success  of  a  concern. 

A  good  location  has  as  important  a  bearing  upon  the 
success  of  a  retail  store  as  it  has  upon  a  factory.  Where 
Location  of  ^0  Start  a  store  is  a  question  which  needs  most 
a  store.  careful  consideration,  and  in  many  cases,  the 
place  chosen  decides  the  success,  or  the  failure  of  an  un- 
dertaking. Special  consideration  should  be  given  to  the 
class  of  trade  wanted,  and  a  location  should  be  selected 
where  the  desired  class  of  customers  pass.  This  can 
easily  be  ascertained  by  studying  the  crowd  passing  a 
certain  point.  Attention  should  be  given  to  quahty 
as  well  as  to  numbers.  Factories  in  a  vicinity  may  be 
the  cause  of  a  great  number  passing  a  certain  point, 
but  it  is  not  a  buying  crowd.     Frequently  the 

Points  to  ..  .    .  ,  Ti 

be  con-  proximity  of  factories  proves  a  disadvantage, 
focation*^  as  the  classes  of  traders  desired,  not  wishing  to 
of  retau  be  jostled  by  the  hurrying  factory  employees, 
pass  along  other  thoroughfares.  A  small 
steady  crowd  is  far  better  than  rushes  once  or  twice  a 
day.  It  is  advisable  to  choose  in  a  retail  section,  for 
people  go  to  shop,  where  the  most  stores  are  situated. 


FACTORY  EFFICIENCY  149 

People  ordinarily  travel  one  side  of  a  street  more  than 
the  other,  and  care  should  be  taken  to  choose  the  right 
side.  A  conspicuous  location  is  very  desirable,  as  it 
proves  valuable  for  advertising,  and  is  certain  to  draw 
trade.  In  small  towns,  near  the  post  office  is  desirable, 
because  people  go  to  the  office  to  get  their  mail.  A 
location  in  the  vicinity  of  other  public  buildings  is,  as  a 
rule,  undesirable.  Wholesale  houses  of  the  same  line  of 
goods  are  usually  located  near  one  another,  wholesale 
It  is  necessary  to  locate  near  others  of  the  *^o^ses. 
same  line,  because  buyers  are  attracted  to  the  section, 
where  the  most  stores  are  situated.  The  most  valued 
asset  of  any  store  is  its  location,  and  very  often,  it 
means  either  success  or  failure  to  an  enterprise. 

No  standard  plan  can  be  given  for  the  design  or 
arrangement  of  factory  buildings,  because  this  depends 
upon  the  kind  of  manufacturing.     The  chief  jjegj^nof 
consideration  is  a  study  of  the  nature  of  the  factory 
product,    and    its   processes   of    production.  ^^* 

The  size  and  design  of  buildings  can  then  be  made  to 
insure  the  most  economical  production,  in  the  particular 
case.    Buildings  especially  suited  for  the  manu-  The  chief 
facture  of  one  kind  of  goods,  may  be  entirely  desiS  and 
unsuited  for  the  manufacture  of  another  prod-  arrange- 

ment  of 

uct.  Future  growth  as  well  as  economical  buUdings. 
production  should  be  given  consideration,  and  no  little 
stress  should  be  placed  upon  the  obtaining  of  an  abun- 
dant supply  of  light.  Whatever  the  design  or  ar- 
rangement of  buildings  or  equipment,  the  chief  aim  is  to 
obtain  the  passing  of  raw  materials  through  the  different 
operations  to  the  finished  product  with  the  greatest 


ISO  ECONOMICS  OF  BUSINESS 

facility,  the  greatest  saving  of  time,  and  the  least  ex- 
penditure of  money,  effort,  and  power.  The  success  of 
many  a  large  factory  depends  upon  its  buildings,  and 
money  should  not  be  spared  in  obtaining  a  design  that 
suits  the  making  of  the  particular  product. 

A  factory  should  be  equipped  with  new  and  highest 
grade  machinery,  as  in  many  cases,  factory  equipment 
Factory  means  either  success  or  failure  to  the  manu- 
equipment.  facturer.  The  problem  of  arrangement  is  an 
important  factor  in  every  factory,  and  often  time  and 
money  are  wasted  by  not  paying  heed  to  it.  Are  there 
sufficient  machines  of  the  best  grade  to  do  the  work  re- 
quired ?  This  is  an  important  question  for  every  manu- 
facturer to  answer.  There  is  a  second  question  that  needs 
solution.  If  a  difference  exists  between  the  rated  capac- 
ity of  a  machine  and  its  actual  output,  what  is  the  cause, 
and  what  should  be  done  to  increase  the  output  to  the 
rated  capacity  ? 

Care  in  attending  machinery  increases  the  efficiency 
of  a  factory.  Carefully  attending,  and  closely  watch- 
Care  of  i^^g  ^11  parts  for  loose  nuts,  bolts,  etc.,  regular 
machinery,  cleaning,  and  proper  oiling  frequently  prevent 
breakages.  Many  factories  find  it  profitable  to  em- 
ploy a  repair  man  whose  duties  are  to  see  that 
Repair  tnun- 

the  machinery  is  properly  tested,  cleaned,  and 

oiled,  and  that  it,  and  the  tools  are  always  in  the  best 
repair. 

Machinery  and  tools  are  always  changing.  Inven- 
tion is  continually  bringing  into  existence  new  tools 
and  machines,  the  introduction  of  which,  may  cause  a 
more  economical  production.     Frequently,  a  manufac- 


FACTORY  EFFICIENCY  151 

turer  is  placed  at  a  decided  disadvantage,  because  his 
competitor   has   cut   his   cost   of   production,   by    the 
introduction  of  recently  invented  machines.   Necessity 
To  assure  the  use  of  the  best  possible  machines  o7new  too^is 
and  tools,  an  expert   is  often  employed   to   andma- 
carefully  study  those  in  use,  others  adapted 
to    the  same  kind   of   work,  and   new  inventions,  to 
see,  if  there  are  any  that  will  produce  the  goods  more 
economically,  and  at  a  lower  cost.     To  lead  the  van  of 
competition  is  the  ambition  of  every  manufacturer,  and 
to  do  so,  he  must  produce  his  goods  at  the  lowest  possible 
cost,  and  at  the  same  time,  quahty  and  workmanship 
must  not  suffer.     An  important  factor  in  obtaining  low 
cost,  is  to  have  the  factory  equipped  with  the  best  possible 
machinery. 

Under  the  old  method,  the  workman  was  responsible 
for  having  ready  for  use  or  securing  as  required,  such 
tools  as  were  needed  in  his  work,  and  was  r^^^i  ^q^p. 
also  required  to  keep  them  in  repair.     Ma-  mentand 

,  .  ,  ,,  .  ,       .  ,     repair  under 

chmes  and  men  were  usually  equipped  with  the  old 
tools  in  constant  use.  The  arrangement  and  °*®*^°^- 
manner  of  keeping  were  left  entirely  with  the  employee. 
Sometimes  they  were  in  racks,  but  frequently  piled  in 
confusion,  so  that  when  a  particular  tool  was  needed, 
it  had  to  be  searched  for  among  many.  Many  tools 
were  lost  through  carelessness,  and  many  rendered  use- 
less through  exposure  to  moisture.  No  record  was  kept, 
and  no  one  knew  the  extent  of  loss. 

A  regular  place  was  usually  provided  for  tools  occa- 
sionally used,  but  provision  was  rarely  made  for  the  com- 
pulsory keeping  of  them  in  proper  place,  when  not  in  use. 


152  ECONOMICS  OF  BUSINESS 

When  a  tool  was  needed,  it  was  the  practice  for  the  work- 
man to  go  on  a  searching  tour  until  the  desired  tool  was 
Great  found.     Often  a  tool  would  be  broken,  and 

careless-       no  thought  given  to  it  until  needed,  and  then, 

ness  m  .  i  i    i        i  .  ,       . 

caring  for  time  would  be  lost  m  obtammg  another. 
tools.  Ye^^  workmen  made  a  practice  of  keeping  their 

tools  in  good  condition,  and  when  a  tool  was  needed,  it 
would  often  be  discovered  that  it  was  dull,  and  the  work 
delayed  while  it  was  sharpened.  It  often  happened  that 
a  workman  rather  than  take  the  trouble  to  put  his  tool 
in  good  condition  would  do  the  best  he  could  with  it,  and 
leave  the  sharpening  to  some  one  else.  A  great  amount  of 
time  was  wasted  by  employees  in  obtaining  and  repair- 
ing tools,  and  by  machines  being  in  idleness,  while  tools 
were  being  sought  or  repaired.  Expenses  for  tools  were 
increased  through  unnecessary  breakages,  and  by  tools 
being  stolen,  misplaced,  or  destroyed.  Additional  loss 
was  made  to  machinery  by  the  use  of  tools  in  bad  repair, 
because  blunt  and  dull  tools  increase  friction,  and  often 
cause  unnecessary  breakages.  Quality  of  output  was 
impaired  and  quantity  decreased.  The  problem  of 
tools  is  an  important  one  in  every  factory,  and  under  old 
methods  it  was  invariably  neglected. 

Increased  competition  forced  manufacturers  to  put 
forth  every  effort  to  lower  costs  of  production.  Every 
Necessity  branch  of  the  factory  was  brought  under  in- 
for  modem  vestigation,  but  nowhere  has  greater  develop- 
ment been  made  than  in  the  tool  department. 
It  is  realized  more  than  ever  before,  that  to  obtain  goods 
of  the  highest  quality,  in  the  greatest  quantity,  and  at 
the  lowest  cost,  modern  tools  should  be  used.    Modem 


FACTORY  EFFICIENCY  153 

tools  should  not  only  be  used,  but  they  should  always  be 
kept  in  the  best  possible  repair,  and  easily  accessible  to 
the  workman  as  needed.  Good  workmen  to  produce 
the  best  results,  should  have  good  tools  with  which  to 
work ;  if  not,  a  less  efficient  man  with  better  tools  gets 
better  results.  Providing  for  the  care  and  repair  of  tools, 
centers  in  the  tool  room,  which  is  aptly  described  as  the 
heart  of  a  factory. 

The  tool  room  is  a  necessary  and  important  part  of 
every  factory.     It  should  be  in  a  central  position  and 
easily  accessible  from  all  parts.     In  large  fac- 
tories, it  may  be  necessary  to  have  several  room,  a 
tool  rooms,  while  in  a  small  factory,  the  tool  p^^^f^^ 
department  may  be  a  part  of  the  stock  room,  every 
The  tool  department  has  three  functions  to 
perform:  first,  the  issuing  and  preserving  of  all  tools  in 
satisfactory  condition;  secondly,  the  repairing  of  tools 
and  machinery;  and,  thirdly,  the  making  of  Functions  of 
tools.     In  storage,  a  place  should  be  provided  tool  de- 
for  every  tool  and  reserved  especially  for  it.  ^^ 
Shelves,  revolving  stands,  or  whatever  is  most  convenient 
and  best  adapted  for  accessibility,  and  ease  in 
obtaining,  should  be  used.     The  manner  of 
storing  depends  upon  the  nature  of  the  tool,  and  in  order 
to  assist  in  easily  finding  desired  tools,  the  various  places 
should  be  distinctly  marked  with  kind,  size,  etc.,  of  the 
tool   contained.    All   tools  should  be  delivered  to  em- 
ployees by  boys.     The  higher  paid  workmen  should  not 
be  allowed  to  waste  their  time  in  going  after  tools.     Tools 
used  constantly  by  several  workmen  should  be  kept  in 
sufficient  numbers  to  meet  all  requests,  while  those  only 


154  ECONOMICS  OF  BUSINESS 

occasionally  used,  need  not  have  many  duplicates,  but 
some  system  should  be  adopted  for  providing  ready  means 
Running  ^^  indicating,  when  a  tool  is,  or  not  in  store, 
inventory  and  if  not,  the  workman  using  it.  In  order 
necessary,  ^y^^^  ^^  ample  Supply  of  tools  is  always  kept 
on  hand,  a  running  inventory  is  necessary  in  every  tool 
room.  Tools  should  not  be  issued  except  on  order  from 
Return  of  a  factory  foreman,  and  should,  on  being  re- 
Jj^^  ^^  turned,  go  to  a  specially  designated  place,  and 
places.  be  examined  by  an  expert  tool  maker,  who  de- 

cides whether  or  not,  they  need  grinding  or  repairing. 
Tools  should  not  be  restored  to  their  places  unless  they 
are  in  the  best  state  of  repair,  and  dull  tools  should  be 
daily  gathered  and  replaced  by  sharpened  ones. 

Every  worker  using  tools  should  have  a  special  place 
to  keep  them,  when  not  in  use,  and  this  arranged  so  as  to 
Repairing  give  the  greatest  facility  in  handling.  Boys 
of  tools.  should  dehver  tools  promptly,  and  place  them 
in  their  proper  places,  and  return  discarded  tools  to  the 
tool  room.  The  greatest  care  should  be  taken  to  see  that 
the  worker  has  the  right  tool  in  proper  shape  at  the  right 
time,  as  this  prevents  delays,  and  causes  the  saving  of 
much  waste  of  time.  All  grinding  and  sharpening  of  tools 
should  take  place  either  in  a  room  adjacent  to  the  tool 
room  or  a  part  of  it.  Grinding  machines  should  be  used 
that  can,  if  necessary,  sharpen  tools  to  any  shape  or  to 
any  angle.  Drills,  wedges,  etc.,  should  be  carefully 
tempered,  properly  ground,  and  correctly  shaped,  as  in 
many  kinds  of  work  nothing  adds  so  much  to  quality 
and  capacity  as  tools  properly  ground  and  adjusted. 
Proper  equipment  should  always  be  kept  on  hand,  for 


FACTORY  EFFICIENCY  155 

giving  prompt  assistance  in  repairing  any  part  of  the 
machines. 

The  making  of  tools  is  work  usually  f oirnd  in  large  fac- 
tories, but  not  in  small.    The  practice  is  to  have  special 
equipment  for  the  sole  purpose  of  making  ^j^^ 
tools,  and  this  to  be  in  charge  of  an  expert  tool  making  of 
maker.     Some,  however,  route  tools  through 
the  factory  like  other  pieces  of  work.    Every  precaution 
should  be  taken  to  make  tools  of  the  highest  grade.    In 
making  steel  tools,  the  best  grade  of  tool  steel  should  be 
determined  upon,  and  then  made  standard.   Before  being 
assigned  to  a  place  in  the  tool  room,  every  tool  should 
undergo  rigid  inspection  and  testing. 

The  great  aim  in  all  manufacturing  is  to  obtain  the 
rapid  production  of  goods  of  the  highest  grade,  and  at 
the  lowest  cost.  This  necessitates  keeping  the  ^^^^  ^^^ 
machinery  in  operation,  as  nearly  as  possible,  in 
one  hundred  per  cent  of  the  working  time.  To 
accomplish  this,  too  much  stress  cannot  be  placed  upon 
obtaining  the  best  possible  supply  of  tools,  always  in  the 
best  condition,  and  distributing  them,  so  that  the  work- 
man always  has  ready  at  hand,  the  proper  tool  in  good 
repair. 

One  of  the  chief  items  of  expense  in  every  manufactur- 
ing plant  is  that  for  materials  used  in  the  production  of 

the  finished  commodities.    A  simple  classifi-  „     .  , 

c  .   1     .  ,.    .  .        r  Materials, 

cation  of  materials  is  a  division  into  stores, 

finished  parts,   supplies,  and  stock.     Stores  consist  of 

materials  produced  outside  the  factory,  but 

which  must  have  utilities  added  before  they 

become  finished  goods.     Purchased  finished  parts  are 


manu- 
facturing. 


iS6  ECONOMICS  OF  BUSINESS 

all  goods  purchased  outside  the  shop  in  their  finished 

Finished       State,    and   used  either    for    assembling  or 

goods.  repairs.     Supplies  include   all  materials  not 

entering  directly  into   the  manufacture  of   a  product, 

but  which  are   necessary  for  conducting  an 

enterprise.     Stock    is    the    finished    product 

ready  for  sale  or  shipment.     It  is  customary  to  include 

purchased   finished   parts   and   suppUes   in   stores.    A 

general  division  into  direct  and  indirect  is 

sometimes  found.     Direct  materials  are  those 

which  enter  into  the  products  themselves,  and  remain 

with  them,  and  can  actually  be  charged  to  the  different 

Direct  commodities,  while  indirect  consist  of  those 

materials,      materials  which  enter  either  slightly,  as  glue, 

varnish,  etc.,  or  not  at  all,  as  factory  supplies,  into  the 

finished  product.     They  cannot  be  charged  directly  to 

any  one  article,  but  the  cost  must  be  scattered  over 

many. 

The  proper  storage  of  materials  is  a  very  important 
work  in  every  factory.  Stores  and  stock  should  be 
storage  kept  in  some  specially  designated  place,  either 
of  materials,  room,  shed,  or  yard.  Goods  that  are  more  or 
less  valuable,  and  easily  carried  away,  should  be  safely 
kept,  while  more  bulky  and  less  valuable  goods  like  lum- 
^       .        ber,  iron,  etc.,  may  be  stored  in  yards  or  sheds. 

Precautions  ^  t  •>         j  ^ 

to  be  taken  All  goods  affected  by  exposure  to  weather  or  the 
in  storage,  gigj^g^ts  should  be  protected  by  covers.  Care 
should  be  taken  to  keep  goods  from  the  ground,  and  with 
many  materials,  to  pile  so  that  currents  of  air  can  freely 
circulate,  as,  for  example,  green  lumber,  if  not  properly 
piled,    decays    qidckly.      Goods   Hke   lime,    salt,    etc.. 


FACTORY  EFFICIENCY  157 

should  be  kept  in  dry  places,  while  others  should  be  kept 
exposed  to  plenty  of  air,  and  sometimes  to  a  certain 
amount  of  moisture.  Extra  precautions  against  fire 
should  be  taken  with  all  inflammable  substances. 

The  storeroom  is    just  as  important,  and  as  prof- 
itable as  space  used  for  machinery.    The  room  should 
be  centrally  located  and  permit  easy  access,  storeroom. 
In  a  large  factory,  there  is  usually  a  central  Location, 
storeroom,  and  branches  for  many  or  all  of  the  depart- 
ments.    In  many  factories,    stores   are   scattered  over 
the  whole  place,  in  the  greatest  confusion,  xheoid 
and  in  the  way  of  workmen  and  machinery,  method  of 

tr  r  •  1       r  1  •         handling 

Very  often,   mstead  of  promptly  removmg  stores  and 
finished  goods  to  the  stock  room,  they  are  ®*°*^^' 
thrown  together  in  confusion,  and  scattered  everywhere 
throughout   the  place.      This  not  only  handicaps  the 
workmen,  and  causes  loss  of  time,  but  frequently  causes 
stoppage  of  machinery. 

The  foremen  frequently  have  no  idea  where  material  is, 
when  needed,  and  often  men  and  machines  are  idle,  while 
it  is  being  found.     Stores  run  short,  causing  ^ 
idleness  for  hours,  frequently  for  days,  until  the  old 
goods  can  be  obtained.     Stores  collected,  and  °^®  °  ' 
carefully  arranged  in  proper  places  not  only  save  time,  but 
economize  space.     Frequently  a  larger  amount,  than 
needed,  is  kept  on  hand,  and  a  greater  amount  of  capital 
is  invested  than  is  necessary.     Factories,  either  large  or 
small,  should  reserve  proper  and  sufficient  space  ^j^ 
for  stores.     It  is  just  as  necessary  in  small  as  in  room  a 
large  factories.     In  the  former,  the  owner  him-  ^^^^^^  ^' 
self  may  take  active  charge,  or  he  may  assign  it,  as  part  of 


158  ECONOMICS  OF  BUSINESS 

the  work  of  a  trusted  employee,  while  in  the  latter,  a  spe- 
cial person  is  assigned  to  take  charge,  and  frequently  it  is 
necessary  to  have  a  large  clerical  force  to  assist  him.  In 
large  factories,  each  department  has  its  storeroom,  con- 
Systemin  taining  the  supplies  needed  for  that  depart- 
arrange-  ment,  each  in  charge  of  a  competent  person. 
The  arrangement  of  the  storeroom  should  be  of 
such  a  nature  as  to  allow  the  greatest  possible  dispatch  in 
filling  orders.  Each  article  should  have  its  own  place, 
suited  in  arrangement,  capacity,  and  location  to  the  re- 
quirements of  efficient  use.  Bins,  shelves,  racks,  etc., 
should  have  easy  access,  and  be  carefully  marked.  Noth- 
ing pays  so  well  as  arrangement  in  a  storeroom. 

There  should  not  only  be  system  in  the  arrangement 
of  material,  but  also  in  recording  the  issue,  so  that  the 
Recording  quantity  remaining  on  hand,  may  always  be 
issue*of*°  known.  The  latter  requirement  is  every  day 
goods.  more  recognized,  as  necessary  to  prevent  over- 

stocking, loss  of  time  arising  from  shortages,  and  search- 
ing for  mislaid  goods,  and  deterioration  of  stock  from  age. 
The  greatest  care  should  be  taken  in  the  issuing  and 
proper  recording  of  the  receipt  of  goods.  A  competent, 
capable  man  should  be  placed  in  charge,  and  all  goods 
should  be  issued  only  through  him,  or  by  his  orders. 
Again,  goods  should  be  issued  only  through  requisition 
Permanent  cards,  signed  by  the  proper  factory  foreman, 
inventory.  Careful  records  should  be  kept  of  all  goods  re- 
ceived, and  the  goods  should,  as  soon  as  possible,  be  dis- 
tributed to  their  proper  places.  A  record  or  permanent 
inventory  should  be  kept  of  all  receipts  and  issues 
of  goods.    This  shows  at  any  time  the  amount  of  each 


FACTORY  EFFICIENCY  159 

kind  of  goods  in  stock.  The  simplest  method  is  to  at- 
tach a  card  or  ticket  to  each  stock  bin  or  shelf,  on 

which  all  receipts  and  issues  are  recorded.  _     , 

.  r  .      .  1  1       How  kept? 

The  practice  m  many  factories  is  to  keep  the 

permanent  inventory  in  a  loose-leaf  ledger.  It  is  not 
necessary  to  have  a  store  or  stock  room,  but  it  is  ad- 
visable. A  good  stock  system  is  a  safeguard  against 
waste  of  material,  theft  by  employees,  and  losses  from 
other  causes. 

Through  a  careful  study  of  the  amount  of  goods  used 
in  the  past,  it  is  possible  to  place  a  maximum  as  well  as 
a  minimum  limit,  upon  the  quantity  of  goods 

otOCK  K6pt 

"necessary  to  keep  on    hand.     These    limits  between 
should  be  carefully  watched,  and  the  stock  of  ^^"*"™ 
goods  should  be  kept  between  the  two  ex-  minimum 
tremes.    This   proves   a   valuable   safeguard 
against    overstocking,    and   failure    to    carry   sufficient 
goods   to  meet   demand.      Dispatching,   which   is  ab- 
solutely necessary  in  running  trains,  is  also  of  Dispatch- 
service  in  a  factory.     Every  requisition  slip  i»g  system, 
should  contain  the  material  wanted,   the  department 
to  which  it  is  to  be  deHvered,  and  the  date  to  be  de- 
livered.   A  dispatching  system  guarantees  the  prompt 
delivery  of  all  goods  wanted,  and  may  be  extended  to  the 
systematic  collecting,  and  storing  of  finished  goods.     In 
every  factory,  workmen  and  machines  should  always  be 
supplied  with  the  proper  amount  of  the  necessary  ma- 
terials.   Dispatching  assures  this,  and  prevents  loss  of  time 
and  idleness  from  shortage  of   goods.     Dis- 

....  .       Importance. 

patching  is  a  time  saver,  and  cost  reducer  m 

every  factory,  and  particularly  so,  in  the  assembling  room. 


i6o  ECONOMICS  OF  BUSINESS 

In  one  machine  shop,  a  force  of  thirteen  men  was  able 
to  assemble  twenty  machines  per  month,  having  a  gross 
value  of  ten  thousand  dollars.  The  introduction  of  a 
dispatching  system  reduced  this  force  to  six  men,  who 
made  a  record  in  assembling  in  one  month,  one  hundred 
somewhat  smaller  machines,  having  a  gross  value  of 
thirty-five  thousand  dollars.     In  all  factories, 

Emergency  -^  ' 

dispatching  it  is  found  advantageous  to  have  an  emergency 
system.  dispatching  system,  to  rush  stores  to  any  quar- 
ter where  sudden  need  arises. 

Time  can  be  saved,  and  cost  lessened  by  using  efiicient 
facilities  for  moving  goods.  Goods  are  usually  moved 
Movement  several  times  during  the  process  of  production, 
of  To  move  goods,  in  and  about  the  place  of  storage, 

°"  *"  ^*  from  storeroom  to  shop,  or  different  shops,  from 
one  machine  to  another,  frequently  from  one  department 
to  another,  and  the  finished  articles  to  the  stock  room  are 
Effidenc  movements  needed  in  every  factory.  Modern 
in  moving  methods,  whenever  possible,  should  be  used  in 
conveying  goods.  In  one  factory,  the  carrying 
of  cans  was  done  by  hand ;  the  introduction  of  a  convey- 
ing belt  saved  considerable  money,  and  gave  better  and 
more  prompt  service.  Space  will  not  permit  the  mention 
of  the  many  hundred  different  devices  in  use,  for  moving 
materials ;  but  even  to-day,  conveying  in  many  factories 
is  carried  on  by  obsolete  methods.  The  expenditure 
of  a  few  dollars  for  the  introduction  of  a  modern 
method  would,  in  the  course  of  a  year,  save  hundreds  of 
dollars. 

Particular  attention  should  be  paid  to  quality  of  goods 
purchased.     Careful  investigation  should  be  made  to  dis- 


FACTORY   EFFICIENCY  i6i 

cover  the  grade  that  will  result  in  the  best  product.  Many 
large  factories  have  finely  equipped  laboratories   Q^gu^y 
for  testing  the  quality  of  goods,  and  experiments  of  goods 
are  constantly  being  carried  on,  to  discover  ^^*^ 
if  different  materials  or  grades  can  be  more  economically 
used.   The  question  is  to  find  out  in  any  good,  Labora- 
the  quality  of  the  part  that  is  utiUzed,  as  in  d^e"en^e 
wood  pulp,  it  is  the  fiber,  in  coal,  the  heat  quaUty. 
unit,  in  sugar  cane,  the  sugar,  etc.     There  are  varying 
quahties,  as  well  as  varying  amounts,  of  the  desired 
quality  per  imit ;  for  example,  a  lot  of  sugar  cane  may 
carry  a  certain  amount  of  sugar,  of  a  certain  quality, 
per  ton  of  cane ;  a  second  lot  may  not  carry  half  the 
amount  of  sugar,  but  of  the  same  grade,  while  a  third 
may  carry  more  sugar,  but  of  a  lower  grade.    What  a 
manufacturer  wishes  to  know  is  the  good  which  contains 
not  only  the  best  quality,  but  also  the  greatest  amount  per 
imit  of  that  quality.     The  same  care  should  be  exercised 
in  buying  repairs.    A  flaw  in  steel  may  not  only  cause 
loss  to  machinery,  but  additional  loss  through  the  stop- 
page of  machinery  and  idleness  of  men.     In  every  in- 
stance, too  great  attention  cannot  be  given  to  the  quality 
of  goods  used  in  every  process  of  production. 

From  the  point  of  view  of  the  finished  article,  quality  is 
an  important  consideration.     Every  manufacturing  firm 
should  strive  to  turn  out  goods  of  the  highest  q„^^  j^ 
quality,  and  none  except  these,  should  be  al-  goods  pro- 
lowed  to  leave  the  premises.    Nothing  so  reacts 
upon  a  firm,  as  to  let  the  consuming  public  learn,  that 
goods  of  a  low  grade  are  allowed  to  go- on  the  market. 
Let  a  manufacturer  convince  the  public  that  only  goods  of 


i62  ECONOMICS  OF  BUSINESS 

the  highest  quality  are  produced,  and  his  success  is  usually 
assured.  Precautions  should  be  taken  to  assure  that  only 
goods  of  the  highest  grade  are  produced.  Competent 
and  trustworthy  inspectors  should  be  chosen,  and  the 
raw  material  should  be  not  only  carefully  inspected,  but 
a  separate  inspection  should  be  made  during  each  process 
of  production,  and  finally  the  finished  article  should  pass 
most  rigid  tests.  Quality  in  goods  cannot  be  overlooked, 
and  should  receive  the  closest  attention  in  buying 
materials  and  in  the  production  of  the  finished  product. 
Business  failures  are  frequently  due  to  neglect  in  care- 
fully examining  the  quality  of  the  goods  purchased,  and 
carelessness  in  putting  goods  of  low  quality  on  the 
market. 

The  economical  use  of  materials  is  a  matter  which 
requires  careful  consideration.  The  ignorance  of  em- 
E  n  micai  P^^Y^^^  as  to  how  to  properly  care  for  goods 
use  of  is  often  the  cause  of  loss.     Exposure  to  light, 

maten  s.  nioisture,  or  dryness  causes  loss  which  care  in 
handling  would  prevent.  Many  manufactures  never  give 
a  thought  to  instructing  their  employees  in  the  eco- 
instruction  nomical  use  of  materials.  The  management 
usfS  should  instruct  all  employees  in  the  proper 

materials.  use  of  materials  and  insist  that  instruc- 
tions be  followed.  A  few  lessons  in  planning  prevent 
waste  in  the  cutting  out  of  garments,  leather  goods,  etc. 
A  few  instructions  in  proper  firing,  and  keeping  boilers 
in  proper  shape  frequently  saves  hundreds  of  dollars 
in  fuel.  Proper  oiling  and  the  careful  use  of  oils  will, 
during  the  course  of  a  year,  add  many  dollars  to  profits. 

The  use  of  waste  products  deserves  some  attention. 


FACTORY  EFFICIENCY  163 

Formerly  factories  sent  to  the  dumping  grounds,  odds 
and  ends,  which  are  now  utilized  in  some  form  or  other. 
Consideration  should  in  every  factory  be  given  ^^^  ^^ 
to  waste  material,  in  order  to  find,  if  some  eco-  waste  prod- 
nomical  use  cannot  be  made  of  it.  Many  large 
factories  have  greatly  added  to  their  profits  by  the  eco- 
nomical use  of  factory  wastes.  Scores  of  plants  have 
saved  hundreds  of  dollars  in  fuel,  by  the  expenditure  of 
a  few  dollars  to  provide  equipment  for  the  obtaining  of 
power  by  burning  of  sawdust,  shavings,  or  other  waste 
products.  Every  one  knows  of  the  vast  sums  made 
by  the  large  packing  houses,  and  oil  refineries  from 
by-products.  Savings  can  be  made  in  small  factories,  as 
well  as  large,  by  attention  to  odds  and  ends.  Scores 
of  devices  are  in  use,  throughout  the  country  for  the 
utilization  of  wastes,  and  this  is  an  item,  which  in  a 
factory  cannot  be  overlooked,  and  should  receive  careful 
consideration. 

While  more  or  less  attention  has  of  late  been  paid  to 
factories,  retail  and  wholesale  stores  have  usually  passed 
unnoticed.      In    the    storing,    moving,   and  Efficiency 
handling  of  goods,   what  has  been  said  of  in  retail 

f     ^     .  ,.  „  .,  and  whole- 

lactories,  appnes  as  well  to  mercantile  enter-  sale  enter- 
prises. Attention  to  quahty  is  equally,  if  not  p"^®^* 
more  important,  in  the  latter  case,  than  in  the  former. 
Many  stores  take  the  greatest  precautions  to  assure 
the  handling  of  goods  of  the  highest  grade.  When  a 
firm's  name  becomes  associated  with  goods  of  a  high  grade, 
it  becomes  a  valuable  business  asset.  Quahty  in  goods 
is  one  of  the  fundamentals  of  business  success.  The 
problem  of   the  economical  use  of  materials,  and  the 


i64  ECONOMICS  OF  BUSINESS 

utilization  of  waste  products  applies  to  a  limited  extent 
to  a  mercantile  enterprise.  In  all  mercantile  estab- 
lishments losses  can  often  be  lessened,  and  even  prevented 
by  following  many  of  the  practices  of  efficient  factories. 

QUESTIONS 

1.  In  locating  a  factory,  what  factors  must  be  considered  ? 
Give  the  importance  of  each. 

2.  What  are  the  chief  considerations  in  the  location  of 
a  retail  or  a  wholesale  establishment  ? 

3.  What  phases  of  the  labor  problem  must  be  considered 
before  deciding  upon  a  factory  location  ? 

4.  What  advantages  has  a  suburban  over  a  country  loca- 
tion? 

5.  What  important  points  must  be  considered  in  designing 
buildings  for  a  factory  ? 

6.  What  savings  are  effected  by  the  proper  arrangement  of 
factory  equipment  ? 

7.  What  method  do  entrepreneurs  pursue  in  order  to  keep 
their  factories  always  equipped  with  the  most  efficient  ma- 
chines and  tools  ? 

8.  Compare  the  old  method  of  caring  for,  and  providing 
tools,  with  the  modern.  What  savings  are  effected  by  the 
latter? 

9.  Why  is  the  tool  room  so  often  described  as  the  heart 
of  the  factory  ?     What  are  its  important  functions  ? 

10.  Plan  a  system  for  storage  of  tools  and  also  one  for 
keeping  track  of  tools  as  to  whether  they  are  in  store,  or  in 
use. 

11.  What  precautions  must  be  taken  in  the  storage  of 
materials?  Mention  several  ways  in  which  waste  may  be 
prevented  by  proper  storing. 


FACTORY  EFFICIENCY  165 

12.  Compare  the  old  methods  of  handling  stores,  while  in 
workshop,  with  the  modern. 

13.  In  what  way  may  costs  be  lowered  by  paying  attention 
to  quality  of  goods  purchased?  From  the  point  of  view 
of  the  finished  produce,  why  is  quality  an  essential  of  success  ? 

14.  What  is  meant  by  the  economical  use  of  materials? 
Mention  several  ways  of  attaining  it. 

15.  How  may  profits  be  increased  by  paying  attention  to 
waste  products  ?    Mention  several  ways  of  utilizing  wastes. 

REFERENCES 

J.  C.  Duncan,  "The  Principles  of  Industrial  Management," 
Chs.  I,  II,  III,  IV,  XVII;  S.  E.  Sparling,  "Business  Organi- 
zation," Ch.  V;  W.  D.  Ennis,  "Works  Management,"  Ch. 
V;  H.  Diemer,  "Factory  Organization  and  Administration," 
Chs.  II,  III,  XIII,  XVI ;  C.  U.  Carpenter,  "Profit  Making  in 
Shop  and  Factory  Management,"  Ch.  V ;  C.  B.  Going,  "Prin- 
ciples of  Industrial  Engineering,"  Ch.  IX;  F.  E.  Webner, 
"Factory  Costs,"  Chs.  V,  VI;  F.  W.  Taylor, "The  Principles 
of  Scientific  Management,"  Ch.  II;  A.  H.  Church,  "Produc- 
tion Factors,"  Ch.  Ill;  0.  E.  Perrigo,  "Modern  Machine 
Shop,"  Chs.  XVIII,  XXIX;  S.  Kirschbaum,  "Business 
Organization  and  Administration,"  Chs.  I-V.  Twelfth 
Census  of  the  United  States,  Report  on  Manufactures, 
Part  I,  Ch.  XXXIX. 


CHAPTER  VIII 

EFFICIENT   BUSINESS   METHODS 

The  shipping  of  goods  in  every  factory  requires  careful 
attention  and  consideration.  The  shipping  department 
The  ship-  ^^  often  badly  neglected,  and  large  losses  an- 
pingde-  nually  occur  through  lack  of  system.  The 
shipping  clerk  or  person  in  charge  of  outgoing 
goods  is  an  important  member  of  every  office  staff.  One 
The  ship-  person,  in  small  factories,  usually  has  charge 
ping  clerk,  ^f  receiving  and  shipping  goods,  but  in  large 
plants,  it  takes  a  large  number  of  employees  under  a  chief 
clerk  to  look  after  the  shipping. 

All  finished  products,  with  the  exception  of  large, 

bulky  articles,  should  go,  on  completion,  to  the  stock  room 

to  await  orders  for  shipment.     No  goods  should  leave 

the  factory  unless  they  go  through  the  shipping  room, 

or  are  shipped  on  instructions  from  the  ship- 
inspectors.       . 

ping  clerk.    An  order,  when  filled,  should  be 

inspected  by  the  proper  official,  who  verifies  to  the  ship- 
ping clerk  that  only  articles  ordered  are  being  shipped, 
and  that  they  are  goods  of  high  standard,  and  what 
were  ordered  by  the  customer.  Inspectors  should 
.  be  trustworthy  employees.     Every  inspection 

should  be  carefully  made ;  if  so,  a  company  will 
be  saved  much  expense  in  shipping  goods  not  ordered  or 

i66 


EFFICIENT   BUSINESS   METHODS  167 

of  a  different  grade.  The  goods,  after  inspection,  should 
be  turned  over  to  the  shipping  clerk  to  be  packed  under 
his  direction,  and  shipped  under  his  instructions. 

Many  factories  lose  annually  hundreds  of  dollars  by 
not   having   a   proper   shipping   system.     Carelessness 
allows  goods  to  leave  the  factory  without   gj^   .^ 
invoices,  and  this  usually  means  absolute  loss,  system 
Goods  are  frequently  allowed  to  go  the  wrong  ^®*^®^^^y* 
route,  and  sometimes  to  the  wrong  destination.    It  should 
be  an  absolute  rule,  that  no  goods  be  allowed  to  leave 
the  factory  without  careful  inspection,  and  proper  ship- 
ping instructions. 

The  question  of  packing  and  routing  goods  is  of  the 
utmost  importance.  It  is  a  special  study  of  the  shipping 
clerk,  but  in  large  factories,  the  work  is  usually  Packing  and 
assigned  to  experts.  Railroads  classify  goods  'o^^i^s- 
and  fix  rates  according  to  classifications.  Frequently 
a  little  different  crating  or  packing,  puts  goods  in  an- 
other classification,  and  at  a  lower  rate.  A  light  crate 
or  the  removal  of  projecting  parts  frequently  allows  an 
article  to  go  at  a  lower  rate.  Sometimes  it  is  cheaper 
to  ship  parts  and  assemble  at  destination.  Care  should 
be  taken  to  properly  describe  goods,  as  damaged  parts 
shipped  as  scrap  pay  a  lesser  rate.  The  classification 
affecting  the  goods  of  a  particular  factory  should  be 
carefully  studied,  and  the  goods  packed  so  as  to  obtain 
the  lowest  rates.  Whenever  possible,  advantage  should 
be  taken  of  the  lower  rates  for  car  lots.  The  minimum 
weight  for  a  carload  should  be  ascertained  over  shipping  by 
all  railroads  over  which  goods  are  shipped.  A  carload, 
consignment  of  minimum  carload  weight  can  be  shipped 


i68  ECONOMICS  OF  BUSINESS 

at  a  saving  as  a  carload  than  less  than  carload.  Roads 
vary  in  their  limit  of  minimum  carload  weights,  so  goods 
may  be  shipped  part  wa.y  at  carload  rates,  and  to  destina- 
tion at  less  than  carload  rates,  or  vice  versa.  Many 
consignments  to  neighboring  towns  may  make  a  carload, 
so  it  will  pay  to  ship  as  carload  to  a  central  point  and  then 
reship  to  destination.  In  the  shipping  of  a  large  con- 
signment of  goods  to  Omaha,  several  dollars  are  saved 
by  shipping  via  New  Orleans  rather  than  directly  by  rail. 
Water  com-  Water  competition  has  a  great  bearing  on 
petition.  rates,  and  whenever  possible,  advantage 
should  be  taken  of  it.  An  expert  on  routing  saves  a 
large  factory  hundreds  of  dollars  annually,  and  proper 
routing  means  a  saving  even  to  a  small  factory,  yet  this 
is  a  part  of  factory  management  which  has  been  very 
much  neglected. 

LiabiHty  and  expense  can  often  be  saved  by  selling 
goods,  "free  on  board  cars  at  factory,  freight  allowed 
„  ,  .  ,     to  destination."    Transportation  charges  are 

Method  of  .  ^  ,  .     .         . 

shipping  to  deducted  by  consignee  from  his  invoice,  and 
shipper  amounts  in  costs  to  the  same  thing  as  ship- 
fromUabU-    ping  the  goods  prepaid.     But  it  is  often  of 

great  advantage  to  the  consignor,  as  it  re- 
lieves him  from  liability  for  delays  or  damages,  after  the 
goods  are  in  the  transportation  company's  possession. 

In  no  Hne  of  business  is  there  greater  waste  than  in 
factories.     Time,  energy,  and  materials  are  wasted  in  an 

infinite  number  of  ways.     Waste  is  the  differ- 

^^aste. 

ence  between  what  is,  and  what  should  be.  In 
raw  materials,  there  are  frequent  wastes  in  buying  and 
using.     In  buying,  waste  is  the  difference  between  what 


EFFICIENT  BUSINESS   METHODS  169 

it  should  cost  to  secure  the  raw  material,  which  is  deter- 
mined by   scientific  test   to   be  best   adapted  to  the 
needs  of  producing  the  best  results,  and  what  -^^5^^ 
is  actually  paid.    Thousands  of  dollars  are  an-  in  buying 
nually  wasted  through  carelessness  in  buying  ^^  ^" 
coal.  In  place  of  carefully  testing  and  determining  the  grade 
of  coal,  that  gives  the  greatest  number  of  heat  units  per  ton, 
and  making  certain  that  such  is  obtained,  it  is  customary, 
to  order  without  any  attention  to  quality.     Poor  qual- 
ity is  discovered  only  through  complaints  of    -^^5^^  j^ 
firemen  or   increased  coal   costs.     Waste  is    the  use  of 
most  common  in  the  use  of  materials.     It  is 
the  difference  between  what  should  be  necessary  to  pro- 
duce a  given  product  under  most  favorable  conditions, 
and  what  is  actually  used.   Under  old  methods,  Modern 
it  was  absolutely  impossible  to  discover  the   ^^-  f^^,  . 

.  .  .  methods  in 

extent  of  waste  m  buying  or  usmg  materials,  discovering 
Its  presence,  if  detected,  was  largely  a  mat-  ^*^*®' 
ter  of  accident,  and  it  was  never  given  serious  con- 
sideration. Modern  methods  are  more  scientific.  Many 
manufacturers  pay  particular  attention  to  the  deter- 
mining and  obtaining  of  materials,  not  only  of  the 
best  quahty,  but  those  best  adapted  for  the  making  of 
the  desired  product.  The  amount  of  materials  that 
should  be  used  in  the  making  of  a  certain  product  is  de- 
termined by  careful  investigation.  This  decides  not  only 
the  existence,  but  the  extent  of  waste.  It  also  gives  the 
basis  for  a  rigid  investigation,  which,  if  properly  and 
scientifically  conducted,  results  in  the  elimination  of 
much  waste  and  the  saving  of  many  dollars. 

Time  is  an  important  element  in  production.     More 


I70  ECONOMICS  OF  BUSINESS 

wastes  occur  through  lost  time  than  from  any  other 
source.  Lost  time  means  a  decrease  in  the  output  and 
Waste  of  an  increase  in  the  expenses  of  production. 
**™®-  Wasted  time  is  the  difference  between  the 

time  taken  to  produce  an  article  under  the  most  favorable 
Various  condition,  and  the  time  actually  consumed. 
wastiM  Time  is  lost  in  many  ways,  some  of  the  chief  of 
time.  which  are :  waiting  for  suppHes  or  materials ; 

waiting  for  other  parts  of  the  plant ;  breakdowns ;  not 
starting  machines  on  time;  stopping  before  the  end 
of  the  working  day ;  not  running  machines  to  capacity ; 
nmning  machines  in  bad  repair;  using  tools  in  bad  re- 
pair ;  not  using  best  methods  for  production  of  goods ; 
soldiering  on  the  part  of  the  workmen.  By  keeping  the 
equipment  always  in  the  best  repair,  by  running  machines 
to  full  capacity  and  to  the  full  extent  of  the  working  day, 
by  efficient  handling  of  all  materials  and  supplies,  by 
efficient  methods  and  the  help  of  an  efficient  working 
force,  much  of  the  wasted  time  of  old  factories  is  eUm- 
inated. 

There  is  much  waste  in  the  common  operations  of 
industry  through  lost  "energies.  The  best  method  for 
Waste  of  performing  a  piece  of  work,  and  obtaining  the 
energy.  desired  result  with  the  least  expenditure  of  ef- 
fort, should  be  discovered  by  careful  study  and  experi- 
mentation. Train  the  men  in  this  method,  and  make 
How  to  certain  of  its  adoption.  This  is  a  decided 
prevent?  contrast  to  the  old  method  of  allowing  every 
employee  to  use  his  own  method  of  doing  a  piece  of  work, 
and  giving  no  thought  as  to  whether  or  not  unnecessary 
movements  were  taken.     The  problem  of  lowering  costs 


EFFICIENT  BUSINESS   METHODS  171 

through  elimination  of  waste  energy  is  of  recent  date. 
The  greatest  factory  experts  in  America  and  in  other 
countries  have  accomplished  much  in  this  field,  and 
the  next  few  years  promise  still  greater  developments. 
Small   wastes   present    the    hardest   problems    in    the 
management  of  stores  as  well   as  factories.     The  de- 
tection of   waste   and   its   elimination   is   a  xhe  de- 
subject  that  deserves  the  closest  attention  of  tection  of 
every  entrepreneur.     The  closest  scrutiny  and  quires  close 
investigation    should    be    constantly    carried   *"®^*io°- 
on  in  every  branch  of  a  factory.     The  aim  in  every  fac- 
tory should  be  to  produce  with  the  greatest  economy  in 
the  use  of  materials,  and  with  the  least  possible  waste  of 
energy  or  loss  of  time  to  either  man  or  machine. 

Inventory,  or  finding  the  amount  and  value  of  goods  on 
hand,  confronts  a  business  man  at  least  once  a  year.  In- 
ventory taking  in  a  mercantile  establishment  is 

.      ,        .        ,  t       .  1       1  Inventory. 

comparatively  simple  as  compared  with  that 
in  a  large  factory.     In  the  former  case,  the  stock  consists 
of  goods  with  a  definite  market  value,  while  in  the  latter, 
a  large  amount  consists  of  partly  finished  prod-  lyjercantUe 
uct.     In  a  factory,  it  is  easy  enough  to  find  the  stores  vs. 
value  of  raw  material  and  finished  goods,  but 
frequently  trouble  arises  with  partly  finished  product. 
A  reliable  cost   system   permits  the  valuation  of   the 
latter  with  Uttle  difficulty,  but  without  one,  it  depends 
usually  on  the  judgment  of  the  foremen  of  the  various 
departments,  and  is  more  or  less  a  matter  of  guess.     If 
an  appraisal  of  factory  and  equipment  is  required,  a  more 
difficult  task  of  finding  the  present  value  of  all  parts 
arises. 


172  ECONOMICS  OF  BUSINESS 

The  value  of  an  inventory  depends  largely  upon  its  ac- 
curacy. The  greatest  care  should  be  exercised  to  assure 
Value  of  exactness  in  counting,  measuring,  weighing, 
aninyen-       ^nd  listing  the  amounts.     Only  reliable  and 

tory  de- 

pendsonits  trustworthy  clerks  should  be  chosen  for  the 
accuracy.  ^^^j^  Every  one  engaged  in  taking  the  in- 
ventory should  be  impressed  with  the  fact  that  accu- 
racy is  the  watchword. 

The  old  method  of  going  around  with  pencil  and  paper, 

listing  the  articles  and  placing  a  more  or  less  random 

valuation  on  them  is  past.     Such  an  inventory 

Old  method. 

is  of  little  value,  as  it  is  filled  with  inaccuracies. 
In  place  of  pieces  of  white  paper,  printed  tags  are  used. 
They  are  numbered,  and  contain  places  for  name  of  arti- 
cle, amount  on  hand,  size,  condition,  place,  price,  and  a 
space  for  the  initials  of  helper  or  checker.  In  factories, 
three  different  colored  tags  are  generally  used,  one  for 
raw  materials,  one  for  partly  finished  goods,  and  the 
other  for  finished  product. 

The  whole  establishment  is  divided  into  divisions. 
Sometimes  a  department  represents  one  division  and 
Prepara-  Sometimes  two  or  more.  A  checker  and  sev- 
tions  for  eral  helpers  are  assigned  to  each  division  and 
xnvenory.  ^^^  head  of  the  department  assists  whenever 
necessary.  Checkers  and  helpers  are  usually  chosen  some 
time  before  inventory  starts,  and  during  the  interval  re- 
ceive instructions  as  to  the  proper  use  of  the  tags,  proper 
method  to  inspect,  weigh,  count,  and  measure  the  goods, 
and  in  giving  proper  description  on  the  tags. 

The  first  stage  of  an  inventory  is  to  find  the  amount 
of  goods  on  hand.    The  prices  are  later  added  in  the  office 


EFFICIENT  BUSINESS   METHODS  173 

and  there  valuation  is  made.     When  a  stock  system  is 
in  operation,  an  inventory  is  for  the  purpose  of  finding 
if  the  stock  records  are  correct,  and  should  be  inventory 
as  carefully  taken  as  when  no  stock  system  ^^^^e  a. 
exists.      If   any  differences   are  found,    the  system 
stock  records  should  be  made  correct.     Many  ®^^*^* 
manufacturers  examine  only  lots  here  and  there  for  the 
purpose  of  comparison  with  the  stock  records,  and  do  not 
make  a  careful  examination. 

The  checker  is  charged  with  all  cards  given  him  and 
every  one  must  later  be  accounted  for.     He  records  the 
information  given  by  the  helpers  on  each  card,  inventory 
and  after  the  count,  fastens  the  tag  to  the  "i  progress, 
particular  lot  or  piece.     This  procedure  continues  until 
everything   has   been   counted   and    tagged.     Business 
continues,  and  when  it  is  necessary  to  remove  goods  from 
a  lot  tagged,  the  employee  notes  on  the  back  of  the  tag 
the  amount  taken.    But  while  inventory  is  in  progress, 
no  goods  should  be  removed  from  one  depart- 
ment to  another.     Extreme  care  should  be  ustingof 
taken  in  listing  goods  in  process  of  manufac-  S!^essof 
ture,  so  as  to  show  the  last  operation.    This  is  manu- 
very  important  in  valuing  the  product,  and  if 
not  done,  inaccurate  results  will  follow.     It  is  advisable 
to  leave  a  space  on  the  tags  for  the  stage  of  production 
of  partly  finished  goods,  and  the  checker  should  take  pains 
to  fill  out  correctly.     In  a  few  cases,  it  may  not  be  con- 
sidered necessary  to  weigh  or  count  the  material,  as  an 
estimate  is  considered  sufficient ;  but  the  head  of  the  de- 
partment and  the  checker  should  be  agreed   upon   the 
amount.    The  tag  should  be  marked  "Estimate"  and 


174  ECONOMICS  OF  BUSINESS 

signed  by  the  head  of  the  department,  and  the 
checker. 

After  counting  has  been  completed,  and  all  goods  are 
tagged,  a  second  force  of  men  is  sent  through  to  collect 
Inspectors  ^^^  ^^^S-  These  act  as  inspectors,  and  at 
and  tag  random  test  the  accuracy  of  the  tags,  and  care- 
fully inspect  the  shelves,  bins,  etc.,  to  see  if  any 
materials  have  not  been  counted.  While  this  process  is 
in  operation,  many  factories  close,  but  such  is  rarely  the 
case  with  mercantile  establishments. 

The  work  is  now  transferred  to  the  office  and  is  placed 
in  charge  of  a  force  of  inventory  clerks  under  a  compe- 
Arrange-  ^^^^  chief.  The  cards  are  carefully  inspected 
ment  of  to  see  that  none  are  missing.  Various  arrange- 
ments of  cards  are  usually  made  to  assist  in 
valuation.  The  cards  having  been  arranged,  the  inven- 
tory is  ready  for  pricing. 

All  staple  materials,  whether  raw  materials  or  finished 
Pricing  of  goods,  should  be  priced  at  market  value.  Care 
goods.  should  be  taken  in  pricing  damaged  goods, 

and  goods  although  new,  yet  for  which,  there  is  no  de- 
mand. The  latter  class  includes  all  goods  out 
of  fashion,  and  often  although  as  good  as 
new,  yet  they  are  practically  valueless,  and  the  only 
Goods  out  suitable  place  for  them  is  the  scrap  heap, 
of  fashion,  jj^  order  not  to  mislead,  sound  judgment 
should  be  exercised  in  the  pricing  of  all  goods. 

Buildings,  machinery,  and  other  equipment  are  valued 
at  their  oridnal  cost,  less  a  certain  sum  for 

Buildings  .... 

and  equip-  depreciation.  This  is  based  upon  the  number 
™*°**  of  years  the  good  has  been  in  service,  and  its 


EFFICIENT   BUSINESS   METHODS  175 

probable  future  life.  In  estimating  future  life,  it  should 
be  borne  in  mind,  that  it  depends  to  a  certain  extent  upon 
progress  of  invention.  A  new  invention  has  often  con- 
signed to  the  scrap  heap,  a  machine  that  otherwise  would 
have  had  many  more  years  of  service.  The  estimates 
in  each  case  should  be  made  by  shop  experts,  and  should 
always  be  conservative. 

The  total  value  of  the  various  goods  is  obtained,  and 
the  amounts  entered  on  a  summary  sheet.    The  cards 
or  tags  form  an  itemized  inventory  of  all  goods  ^      ^^ 
on  hand,  and  should  be  filed  away  for  future  itemized 
reference.     The  inventory  not  only  furnishes  "^^^°  °^' 
an  accurate  state  of  business,  but  records  for  careful 
study.     It  shows  whether  or  not  departments  importance 
are  over  or  under  stocked.    It  draws  the  at  ten-  of  an  in- 
tion  of  the  entrepreneur  to  the  presence  of  ^^^°'^' 
imdesirable  stock,  which  should  be  sold  at  any  price, 
and  its  place  occupied  by  salable  goods.    Without  a  stock 
system,  an  inventory  is  of  invaluable  service,  and  with 
it,  it  tests  the  accuracy  of  the  stock  records. 

One  of  the  important  changes  introduced  in  modern 
industry  has  been  the  adoption  of  standards  of  various 
kinds.     A  standard  is   that  by  which   size,   standard- 
form,  quantity,  quality,  or  method  is  fixed  or  i^ation. 
regulated.     Standardization  is  the  setting  up  and  the 
rigidly  following  such  standards.     Manufacturers  who 
produce  in  large  quantities  for  the  market  it  is  the 
find  it  absolutely  necessary  to  adopt  standard  starting 

...  ,  f  ,      point  for 

Sizes,  weights,  shapes,  and  sometimes  stand-  cheaper 
ard  quality  for  their  products.     In  introducing  Production, 
standardized  products,   the  operations  are  reduced  to 


176  ECONOMICS  OF  BUSINESS 

a  routine  and  as  a  result,  the  repetition  allows  cheaper 
production.  Standardization  is  therefore  the  starting 
point  in  producing  goods  cheaply,  and  in  large  quantities 
for  a  competitive  market. 

In  making  standardized  products,  it  is  possible  and 
advantageous  to  spend  large  sums  for  special  machinery 
Advantages  and  equipment,  which  not  only  reduces  the 
ked^o"**"  cost  of  production,  but  greatly  increases  its 
««*»•  rapidity.     The    sizes,    shapes,    and    weights 

which  are  best  adapted  for  general  use  are  selected  as 
standard,  and  these  are  turned  out  in  large  quantities. 
Frequently,  where  quick  delivery  is  essential,  it  allows 
the  filling  of  an  urgent  demand.  The  Egyptian  govern- 
ment desired  at  short  notice,  the  erection  of  a  bridge  from 
Atbara  to  La  Salle.  Thirty-eight  English  firms  competed, 
but  none  could  make  delivery  on  time.  The  contract 
was  given  to  an  American  company,  and  within  twenty- 
seven  days  after  its  receipt,  the  bridge  was  ready  for 
shipment.  The  task  was  possible  because  the  bridge  con- 
struction parts  were  standardized. 

The  determination  of  a  standard  quality  in  product, 
and  taking  rigid  measures  to  prevent  any  goods  below 
standard  ^^^  Standard  from  going  on  the  market,  gives 
quauty:its  a  decided  advantage  to  any  manufacturing 
unpo  ance.  ^^^  ^^^^  Consuming  public  soon  learns  of 
the  high  quality  of  goods,  and  demands  them  in  preference 
to  others.  There  is  no  asset  so  valuable  to  any  firm  as 
the  confidence  of  the  people  in  the  goods  that  it  produces, 
and  nothing  wins  it  more  quickly  than  the  constant  sell- 
ing of  goods  of  the  highest  grade.  This  is  made  possible 
by  the  adoption  of  a  high  standard  of  quality  and  care 
that  it  is  rigidly  enforced. 


EFFICIENT  BUSINESS   METHODS  177 

As  important  as  standardization  is  in  the  product  and 
its  quality,  it  is  of  equal  importance  in  a  factory.  There 
should  be  standard  machines,  standard  tools,  standard- 
standard  methods  of  using  and  caring  for  them,  ne^ggary  in 
and,  in  fact,  standard  methods  for  every  opera-  ^^  factory, 
tion.  Few  factories  have  reached  this  stage,  but  great 
advancement  has  been  made  during  the  last  few  years, 
and  the  time  is  not  far  distant  when  the  larger  portion 
of  the  factories  will  be  highly  standardized. 

The  adoption  of  standard  tools  and  machines  should 
be  made  only  after  careful  investigation.     Experts  should 
closely  examine  the  details  of  the  work,  and  de-  standard 
cide  upon  shapes,  sizes,  and  kinds  of  machines  tools  and 
and  tools  most  conducive  to  efficient  produc- 
tion.    The  adoption  of  standards  does  not  mean  the 
doing  away  with  change.     Experts  should  at  all  times 
carefully  study  the  standard  tools  and  machines  as  well 
as  others,  and  if  another  tool  or  machine,  shape  or  size, 
is  better  suited  to  the  operation,  the  former  standard 
should  be  discarded  and  the  new  one  adopted.     Changes 
should  not  take  place  except  after  careful  investigation 
by  experts,  and  their  decision  that  the  new  standard  is 
advantageous  and  advisable. 

The  adoption  of  standards  for  methods  of  doing  work 
and  using  machines  is  daily  attracting  more  attention. 
The  method  adopted  as  standard  should  be  standard 
that  decided  upon  by  men  who  are  best  quali-  "methods, 
fied  to  pass  upon  the  subject.  The  standard,  when 
adopted,  should  be  rigidly  enforced  and  its  use  the  only 
one  allowed  in  a  factory.  Experts  should  carefully 
study  the  standards,  and  as  soon  as  a  better  method 


178  ECONOMICS  OF  BUSINESS 

is  discovered,  the  old  standard  should  be  discarded  for 
the  new.  Care  should  be  exercised  and  proof  ascer- 
tained that  the  new  method  is  an  improvement  over 
the  old  before  a  change  is  made. 

Standards  should  be  the  result  of  careful  investigation 
and  should  represent  the  best  possible.  They  should 
Modern  ^^  obtainable  imder  ordinary  conditions  as 
tendency       ^ell  as  practical.     Standardization  stands  for 

towards 

standard-  one  kind  of  equipment,  uniform  methods 
"***®^  and  materials,  which  means  a  great  source  of 
economy.  The  tendency  of  the  modem  industrial  world 
is  toward  standardization  in  product  and  every  part  of 
its  production. 

Every  manufacturer  knows  that  buildings  and  equip- 
ment cannot  be  used  without  deterioration.  Deteriora- 
Every  busi-  ^^^^j  ^^  ^^^  provided  for,  in  time  impairs  the 
ness  enter-  earning  power  of  any  factory,  and  eventually 
ject  to  de-  forces  it  into  bankruptcy.  If  the  working 
tenoration.  efficiency  of  a  factory  is  not  to  decrease,  its 
buildings  and  equipment  should  perpetuate  themselves  by 
repairs,  improvements,  and  replacement.  While  build- 
ings and  equipment  are  passing  from  the  state  of  newness 
and  excellence  to  age  and  uselessness,  a  sum  should  be 
set  aside  to  provide  for  replacement  when  the  day  of 
uselessness  arrives.  This  is  done  by  making  a  yearly 
Deprecia-  allowance  for  depreciation.  Depreciation  is  a 
*>o^-  decrease  in  the  value  of  buildings  and  equip- 

ment due  to  wear  and  tear,  effect  of  the  elements,  course 
of  trade,  or  new  inventions.  Some  form  of  depreciation 
is  found  in  every  factory.  Few  things  require  more 
careful  attention  and  sounder  judgment,  than  the  fixing 


EFFICIENT  BUSINESS   METHODS  179 

of  the  annual  amount  of  depreciation  to  be  charged  to 
the  general  expense  of  a  factory.     The  proper  account- 
ing of  depreciation  is  absolutely  necessary  in  every  plant, 
yet  in  many,  little  attention  is  paid  to  it.     Dis-  Mainte- 
tinction  should  be  made  between  maintenance  ^^*^*^®* 
and  depreciation.     The  terms  are  essentially  different, 
yet  many  look  upon  them  as  synonymous.     Maintenance 
is  the  amount  necessary  for  keeping  a  plant  and  its 
equipment  in  the  best  state  of   repair.     The  gradual 
wearing  away  due  to  age  cannot  be  remedied  by  repairs, 
nor  can  repairs  prevent  machinery  from  be-  Deprecia- 
coming  obsolete.     No  matter  how  great  care  ^°ever?^^* 
is  taken    to  maintain  a  plant  in  the   best  factory, 
possible  condition,  there  is  a  gradual  and  an  inevitable 
depreciation.     In  a  new  plant,  this  may  not  at  first  be 
noticeable,  but  it  is  nevertheless  present,  and  the  loss 
it  incurs,  should  be  provided  for  from  the  first.     Proper 
maintenance  increases  the  durabihty  and  Hfe  of  a  ma- 
chine or  building  and  should  be  given  due  consideration 
in  estimating  the  annual  charge  due  to  depreciation. 

The  durabihty  and  Hfe  of  equipment  depends  in  a  great 
measure  upon  its  use.  Nothing  is  so  impor-  Proper  care 
tant  in  determining  depreciation  as  a  careful  o?tqm>^^ 
consideration  of  the  conditions  governing  the  ment. 
use  of  the  particular  machine  or  appHance.  The  constant 
keeping  of  every  part  of  an  equipment  in  best  repair 
adds  greatly  to  the  length  of  service.  A  loose  shaft, 
nut,  or  bolt  may,  in  a  short  time,  do  more  damage 
than  would  result  from  six  months'  or  a  year's  use. 
Keeping  all  parts  free  from  dust  and  properly  lubricated 
with  the  best  grade  of  oil  adds  to  the  durability  of  any 
equipment. 


i8o  ECONOMICS  OF  BUSINESS 

Extreme  care  should  be  taken  in  the  installation  of  all 
machinery.  This  is  one  of  the  important  points  to  be 
Conditions  Considered  in  estimating  the  life  of  any  ma- 
d^abmty  chine.  Careful  installation  is  particularly 
of  machines,  necessary  wherever  a  machine  is  run  at  great 
velocity,  or  subject  to  shocks,  concussions  or  constant 
strain.  The  framework  should  be  of  sufficient  weight 
to  withstand  as  much  of  the  strain  as  possible;  if  not, 
the  constant  strain  will  affect  the  life  of  the  machine. 
Piece  work  gives  greater  strain  and  greater  wear  and 
tear  than  time  work.  The  number  of  hours  of  work 
affects  the  durability  of  any  machine.  Machines  kept 
at  utmost  capacity  are  under  greater  strain  than  those 
which  are  not,  and  this  affects  their  durability. 

No  factory  is  free  from  its  machinery  becoming  obso- 
lete. A  machine  is  useless  when  a  more  efficient  one 
is  invented,  which  does  not  make  it  economical  to  con- 
Obso-  tinue  the  use  of  the  old  machine.     Inventions 

lescence.  jj^  machinery  are  constantly  taking  place.  No 
manufacturer  can  tell  when  an  invention  will  force  him  to 
discard  his  old  and  install  more  improved  machines  in 
order  to  keep  pace  with  competition.  A  machine  which 
imder  ordinary  conditions  would  have  a  life  of  fifteen 
years  might,  at  the  end  of  three,  be  assigned  to  the 
scrap  heap,  as  a  result  of  a  new  invention.  No  manu- 
facturer can  tell  when  his  machines  will  become  obsolete, 
Greater  in  as  no  one  can  foretell  what  the  future  will 
dSsfriM'  bring  forth.  Some  machines  have  a  greater 
than  others,  tendency  towards  obsolescence  than  others, 
because  invention  works  more  rapidly  in  some  lines  of 
industry  than  others.    In  some  industries,  few  improve- 


EFFICIENT  BUSINESS   METHODS  i8i 

ments  have  during  the  last  few  years  taken  place,  while 
in  others  many  machines  had  been  in  use  only  a  short 
time  when  as  a  result  of  new  inventions  they  had  to  be 
replaced  by  more  improved  machines.  The  tendency 
towards  obsolescence  on  account  of  new  inventions  should 
receive  careful  consideration  in  fixing  depreciation. 

A  second  form  of  obsolescence  is  found  in  many  lines 
of  production.     Machinery  may  become  obsolete  not  as  a 
result  of  new  inventions,  but  because  there  is  no  longer 
sale  for   the  goods  for  which  it  is  used  in  Q|,gj,jgg. 
producing.     This  applies  more  particularly  to  cence 
machinery   used   in    making   goods  affected  demand  Tor 
by  changes   in   style   and   fashion.     A  ma-  machinery, 
chine    that   can  be   used  only   in   making  an    article 
of  a  particular  style  should  necessarily  have  a  high 
rate  of  depreciation,  because  its  assignment  to  scrap  de- 
pends upon  the  change  in  the  whims  of  the  people. 
Manufacturers  should  be  very  careful  to  provide  for  con- 
tingencies of  the  future  as  well  as  for  wear  and  tear. 

Depreciation  for  buildings  should  be  considered  as  well 
as  for  machinery  and  equipment.     Many  consider  build- 
ings kept  in  good  repair  as  permanent.     Such  ^^      j^_ 
is  not  true,  because  at  the  end  of  some  period  tionof 
in  the  future,  perhaps  long,  or  it  may  be  short,         *°^^' 
a  building  used  for  industrial  purposes  becomes  unsuit- 
able for  the  original  use,  and  when  this  time  comes,  it 
is  greatly  decreased  in  value  and    often  is   Conditions 
valueless.     The   Hfe  of   a  building   depends  ^J^^T?^ 
upon  many  conditions  of  which  the  most  im-   bmiding. 
portant  are:  nature  of  the   building;  character  of  its 
construction;   conditions  under  which  it  is   used;   its 


i82  ECONOMICS  OF  BUSINESS 

care  and  protection;  and  changes  in  methods  of  pro- 
duction. 

Brick  and  stone  buildings  have  a  life  from  three  to 
four  times  that  of  frame  or  wooden  structures.  The  qual- 
n     w.         ity  of  materials  used  as  well  as  the  care  exer- 

Construc-  -^ 

tion  and  cised  in  construction  are  important  factors  in 
"***  durability.    A  building  poorly  constructed  and 

made  of  poor  materials  requires  a  depreciation  two  or  three 
times  as  great  as  one  properly  built  of  the  best  quaHty 
materials.  Buildings  used  as  foundries  or  smithies, 
as  well  as  those  which  bear  the  strain  of  shafting,  heavy 
cranes,  machinery  moving  at  high  speed,  and  concussions 
have  usually  comparatively  short  lives.  A  very  neces- 
sary factor  in  determining  the  Ufe  of  any  building  is 
Promptness  promptness  in  repairing.  Carelessness  in  not 
in  repairing,  promptly  repairing  the  roof  of  a  building  may 
take  ten  years  off  its  period  of  usefulness.  Occasional 
painting  helps  to  preserve  both  wood  and  iron.  Repair- 
ing a  broken  sill,  beam,  or  rafter  saves  other  parts  of 
Changes  in  ^  building  from  extra  strain.  Changes  in 
method.  methods  of  production  may  take  away  the 
usefulness  of  a  building  for  its  original  purpose.  A  few 
years  ago,  the  erection  of  large  tanneries  made  it  unprof- 
itable for  small  tanneries  to  operate,  and  hundreds  of 
buildings,  not  being  suitable  for  other  purposes,  became 
almost  valueless. 

Formerly  manufacturers  paid  little  heed  to  deprecia- 
_  ,     .        tion.    The  plants  were  maintained  in  good  con- 

Detenmna-  ^  ° 

tion  of  de-  dition,  and  no  sum  was  set  aside  for  loss  of  cap- 
preaation.  .^j  ^^^  ^^  ^^^^  ^^^  ^^^^  To-day,  more  at- 
tention is  paid  to  it,  and  its  importance  as  an  item  of  cost  is 


EFFICIENT   BUSINESS   METHODS  183 

recognized.  At  first,  the  estimating  of  depreciation  was 
merely  a  matter  of  guess.  An  arbitrary  sum  was  set 
aside  to  cover  wear  and  tear,  and  obsolescence.  Later, 
it  was  recognized  that  depreciation  could  only  be  deter- 
mined by  estimating  the  useful  life  of  buildings  and 
equipment,  and  their  value  at  the  end  of  the  period,  and 
spreading  the  difference  between  the  original  cost  and  the 
scrap  value,  over  the  period  of  life.  Scrap  value  varies 
in  amount.  Some  machines  contain  many  pounds  of 
valuable  metal,  while  others,  it  will  not  pay  to  cart  away. 
Some  may  be  repaired  and  sold  for  other  purposes,  while 
others  have  no  value  except  for  the  metal  they  contain. 
The  same  is  true  regarding  buildings.  Some  may  be 
remodeled  and  used  for  other  purposes,  while  others 
represent  only  an  expense  for  removal. 

Buildings  and  machines  vary  in  the  length  of  their 
lives  of  usefulness.  The  Hfe  of  the  same  kind  of  ma- 
chines varies  in  two  factories,  because  in  no  „         ,    , 

'  No  standard 

two  factories  are  the  local  conditions  exactly  life  can  be 
the  same.  No  standard  hfe  can  be  given  for  ^^gr  nL- 
any  machine  or  building,  but  each  case  must  chines  or 

.,  ,  ,  buildings. 

be  judged  on  its  merits,  and  the  estimate  of 

life  of  service  be  made  by  one  able  not  only  to  judge  local 

conditions,  but  also  the  possibility  of  obsolescence. 

Many  different  ways  have  been  devised  for  charging 
expense  with  the  proper  amount  of  depreciation.     The 
simplest,  and  the  one  most  commonly  used,  is  Methods 
to  divide  the  difference  between  the  original  ?^gd^pr|"_ 
cost  of  the  machine  or  building,  and  its  scrap  ciation. 
value,  by  the  estimated  number  of  years  of  service.     The 
quotient  is  the  annual  amount  to  charge  to  expense.    A 


i84  ECONOMICS  OF   BUSINESS 

second  method  is  to  provide  a  sinking  fund  which,  at  the 
expiration  of  the  life  of  plant  or  building,  provides  for 
its  replacement.  A  third  is  one  that  to-day  is  attracting 
special  attention.  It  is  to  charge  a  high  rate  when  a 
machine  or  building  is  new,  and  then  gradually  reduce  it. 
Several  plans  have  been  devised  for  doing  this,  but  Cole's 
method  seems  the  most  satisfactory.  He  first  estimates 
Cole's  the  life  of  the  machine  or  building.     Then  he 

method.  takes  the  difference  between  the  cost  and  scrap, 
and  depreciates  each  year,  a  fraction  comprising  the 
number  of  years  of  life  as  a  numerator,  and  the  sum  of 
the  years  as  a  denominator.  If  the  life  of  a  machine 
is  seven  years,  add,  7,  6,  5,  4,  3,  2,  i,  or  28;  for  the  first 
year,  the  depreciation  would  be  2V,  for  the  second  ^^, 
and  for  the  last  ^V* 

Buildings  are  often  taken  as  a  whole  and  a  certain 
yearly  depreciation  fixed,  but  they  vary  in  their  depre- 
ciation, and  should  be  considered  separately. 

Inventory  .  r  i  •  a 

should  be  The  same  is  also  true  of  machmes.  A  com- 
Sd^gs  Pl^^^  inventory  should  be  kept  of  all  build- 
and  ma-  ings  and  equipment.  A  convenient  way  is  to 
have  a  card  for  each  building  and  machine. 
This  card  should  show  the  cost  of  the  building  or  machine, 
the  date  of  erection  or  installation,  years  of  life,  use  and 
previous  yearly  depreciation.  At  the  end  of  each  year, 
the  depreciation  for  the  year  should  be  noted.  The 
cards  carefully  indexed  should  at  any  time  show  the 
present  value  of  any  building  or  machine.  The  depre- 
ciation burden  would  be  distributed  to  those  parts  where 
it  rightly  belongs. 

Small  tools  and  small  articles  of  equipment  cannot  be 


EFFICIENT  BUSINESS   METHODS  185 

treated  separately  like  machines.     They  usually  wear 
out  quickly,  and  have  short  lives,  frequently  Charging 
not  more  than    three  or  four  days.     Two  ^J^^^^^' 
methods  are  used  in  their  case.     The  first  smau  tools, 
is  to  value  every  year ;  the  second  is  to  maintain  and 
renew  as  required,  and  value  only  occasionally.     The 
first  method  is  more  accurate  and  preferable. 

Depreciation  is  present  in  every  factory.     It  is  a  nec- 
essary expense  of  production,  and  as  such,  should  be  ac- 
counted for  and  properly  charged.     In  every  Deprecia- 
business,  depreciation  is  a  factor  which  must  be^roperiy 
receive  its  due  amount  of  attention.     It  is  an  charged, 
expense  item  which  should  not  be   neglected,  and  to 
charge   properly  requires   careful   thought   and   sound 

judgment. 

QUESTIONS 

1.  What  are  the  duties  of  a  shipping  clerk?    Why  is  his 
position  important  ? 

2.  What  is   routing?    How  can   expenses    be   reduced 
through  routing? 

3.  What  is  waste  ?    Name  different  ways  in  which  waste 
occurs. 

4.  Name  the  different  ways  of  wasting  time.    How  may 
they  be  eliminated  ? 

5.  What  is  waste  of  energy  ?    How  may  it  be  prevented  ? 

6.  What  is  an  inventory  ?    Upon  what  does  its  importance 
depend  ? 

7.  Outline  a  practical  system  for  inventory  taking. 

8.  What  precautions  should  be  taken  in  valuing  stock  in 
inventory  ?    How  are  buildings  and  machinery  appraised  ? 

9.  Why  is  standardization  said  to  be  the  starting  point  for 
cheaper  production  ? 


i86  ECONOMICS  OF  BUSINESS 

10.  What  are  the  advantages  arising  from  (i)  standard 
products ;  (2)  standard  quality ;  (3)  standard  machines  and 
tools ;  (4)  standard  methods  ? 

11.  What  is  depreciation  ?  How  does  it  differ  from  main- 
tenance ? 

12.  What  are  the  conditions  affecting  the  length  of  service 
of  buildings  and  materials  ? 

13.  What  is  obsolescence?  Why  is  it  greater  in  some  in- 
dustries than  in  others  ? 

14.  What  are  the  different  methods  for  charging  deprecia- 
tion ?    What  is  the  Cole  method  ? 

15.  Why  is  it  essential  to  distribute  depreciation  burden 
to  where  it  belongs  ?  Give  methods  for  charging  deprecia- 
tion expense  for  small  tools. 

REFERENCES 

J.  C.  Duncan,  "The  Principles  of  Industrial  Management," 
Ch.  XVII ;  J.  L.  Nicholson,  "Nicholson  on  Factory  Organiza- 
tion and  Costs,"  Ch.  XXXII ;  S.  H.  Bunnell,  "  Cost  Keeping 
for  Manufacturing  Plants,"  Chs.  XII,  XIII,  XIV;  H.  Emer- 
son, "Efficiency,"  Chs.  V,  VI,  VIII;  W.  D.  Ennis,  "Works 
Management,"  Ch.  VII;  H.  Diemer,  "  Factory  Organization 
and  Administration,"  Chs.  XVII,  XX;  C.  U.  Carpenter, 
"Profit  Making  in  Shop  and  Factory  Management,"  Chs. 
VI,  VIII,  IX,  X;  F.  E.  Webner,  "Factory  Costs,"  Ch.  XIV; 
H.  Evans,  "Cost  Keeping  and  Scientific  Management," 
Ch.  X;  E.  Matheson,  "The  Depreciation  of  Factories"; 
P.  D.  Leake,  "Depreciation  and  Wasting  Assets." 


CHAPTER  K 

LABOR  EFFICIENCY 

American  industries  have  during  the  past  twenty-five 
years  developed  very  rapidly,  and  their  character  has 
undergone  many  changes.     Increased  compe-  speciaiiza- 
tition  has  made  necessary  the  large  producing  pr**e^  *nt,  the 
plant,  and  specialization  has  become  in  indus-  watchword, 
try  the  watchword.     Machinery,  materials,  and  methods 
have  been  carefully  studied,  but  labor  has  long  passed 
unnoticed.     It  is  only  recently  that  employers  recognized 
the  importance  of  the  human  factor  in  the  mak-  Labor 
ing  and  marketing  of  goods.    The  human  head  i^o^^neg- 
and  hands  which  operate  the  machines  are  im-  lected. 
portant  factors  in  our  industrial  system.     The  study  of 
the  employee  to  understand  the  various  elements  that 
affect  his  working  power  is  a  most  important  and  seri- 
ous problem  for  a  business  man.     The  employer  should 
understand  that  he  has  to  deal  with  the  workman  as 
he  is,  and  that  deaUng  with  theories  and  ideals  can 
never    result    in    efficiency.       The    workman    should 
thoroughly  know  his  machine  to  obtain   the   best   re- 
sults from  its  working.    This  has  been  recognized  since 
the  introduction  of   machinery,  but  the  employer  has 
not  grasped  the  necessity  of  understanding  and  know- 
ing his  workman  in  order  to  obtain  the  best  results  from 

187 


i88  ECONOMICS  OF  BUSINESS 

his  labor.  It  is  surprising  how  long  the  employer  has 
overlooked  this  essential.  Until  the  dawn  of  the  twen- 
Attitudeof  tieth  century,  the  average  employer  in  his 
toward*^  deaHngs  with  his  working  force  was  heartless 
employees,  and  cruel.  He  treated  them  rather  as  inani- 
mate objects,  than  as  human  beings  with  feehngs.  The 
laborer  was  looked  upon  as  part  of  the  factory  equipment, 
rather  than  a  man  with  rights  and  privileges.  Present 
labor  conditions,  unions,  and  employers'  associations  are 
the  natural  and  necessary  result  of  methods  of  handling 
workmen. 

The  small  factory  which  a  few  years  ago  was  the  pre- 
vailing type  in  our  industrial  system  gave  way  under 
Revival  of  competition  to  the  large  plant,  employing 
Uce^p^^'  thousands  of  workmen.  Invention  kept  pace 
system.  with  industrial  growth,  and  more  compH- 
cated  machines  took  the  place  of  the  rather  simple  ones 
of  the  small  factory.  The  large  plant  with  its  intricate 
machinery  demanded  expert  machine  hands  and  the 
result  was  a  rapidly  diminishing  supply  of  properly 
trained  men.  A  few  years  ago,  it  looked  as  though  the 
scarcity  of  skilled  workmen  would  be  a  serious  drawback 
to  our  industrial  development.  Necessity  drove  employ- 
ers individually  to  make  provision  to  provide  for  and 
maintain  a  supply  of  skilled  workmen.  The  result  was 
a  revival  of  the  apprenticeship  system,  but  one  differ- 
ing in  every  detail  from  that  which  dominated  industry 
for  several  hundred  years. 

■"  The  old  system  of  apprenticeship  served  its  purpose 
under  the  domestic  system,  but  the  rapid  changes  in 
industrial  conditions  under  the  factory  system  soon  made 


LABOR  EFFICIENCY  189 

it  antiquated.  A  boy  was  apprenticed  to  a  journeyman 
until  he  became  a  skilled  mechanic.  The  mechanic 
skilled  in  all  parts  of  a  trade  has  been  supplanted  by 
the  speciaHst  skilled  in  one  operation.  Educa-  Principles 
tion  did  not  keep  pace  with  industrial  prog-  apprentice- 
ress,  and  employers  were  forced  to  train  ship, 
their  own  men.  To-day  many  factory  apprenticeship 
systems  are  in  practice.  Two  types  may  be  given. 
The  one  is  where  school  instruction  is  given  during 
working  hours,  and  the  other  where  it  is  given  in 
evening  school.  The  various  systems  differ  in  detail, 
but  the  general  principles  of  putting  the  apprentice  under 
a  competent  instructor,  whose  duty  it  is  to  see  that  proper 
instruction  is  given,  that  the  apprentice  is  advanced  from 
one  kind  of  work  to  another,  and  that  his  mental  develop- 
ment keeps  pace  with  his  acquired  skill,  are  the  same  for 
all. 

Many  technical  schools  have  recently  been  established 
for  the  purpose  of  training  skilled  mechanics.  Experi- 
ence has  proven  that  they  cannot  satisfacto-  Technical 

rily  take  the  place  of  the  factory  apprenticeship   '^^'  ^ac- 

11         -f-.!  1.11  1.     *o^  appren- 

scnools.     Employers  admit  that  trade  techm-  ticeship 

cal  schools  give  good  training  and  are  valuable,  ^^^°°^^' 
but  they  declare  that  they  cannot  give  the  training  under 
actual  working  conditions  which  the  factory  school  gives. 
The  graduate  of  a  trade  school  is  given  credit  for  his 
work,  and  his  apprenticeship  is  shortened.  The  factory 
apprenticeship  school  is  increasing  in  favor,  and  is  des- 
tined to  play  an  important  part  in  our  industrial  devel- 
opment. The  large  factory  demands  a  number  of 
skilled  mechanics,  and  the  best  means  to  obtain  a  supply 


I90  ECONOMICS  OF  BUSINESS 

and  maintain  it,  seems  to  be,  for  employers  to  train  their 
own  men. 

Shop  instruction  is  by  no  means  philanthropic  in  its 
nature.  It  is  good  business,  and  business  motives  guide 
Reward  of  c^iployers  in  the  installation  of  factory  schools, 
factory  in-     The  schools  supply  a  better  class  of  workmen, 

struction.  ,  .  ,  .     .  ^ , 

and  permanency  m  employment  is  greatly 
strengthened.  Personal  contact  with  instructors  and 
training  in  the  shop  give  a  friendly  attitude  towards 
employers,  environment,  and  working  conditions.  It 
arouses  personal  interest  and  enthusiasm,  and  assists 
in  obtaining  hearty  cooperation  in  the  work.  The 
spirit  of  cooperation  which  it  arouses  is  a  most  valu- 
able asset,  and  one  which  in  itself  fully  repays  the  cost 
of  training. 

The  nineteenth  century  was  characterized  by  a  lack 
of  interest  of  employers  in  their  employees.     There  were 

exceptions  where  employees  were  treated  as 
treatment  though  they  were  human,  but  the  average  em- 
caused^by  ploy^r  looked  upon  his  laboring  force,  as  part 
business       of  his  factory  equipment,  and  had  as  much 

feeling  for  the  laborer  as  he  had  for  a  cog  in 
one  of  his  machines.  The  twentieth  century  awakened 
in  the  employer  a  new  interest.  He  realized  that  an 
important  factor  in  production  and  distribution  is  the 
human  factor,  and  this  aroused  an  interest  in  thev  hu- 
man element  in  industry.  It  is  not  charity  or  philan- 
thropy, but  pure  business.  Skill  rather  than  brawn  and 
muscle  is  needed,  and  to  obtain  skilled  men  with  brains, 
and  to  get  them  to  do  their  best  work,  they  should  be 
treated  as  human  beings.    America,  with  its  splendid 


LABOR  EFFICIENCY  191 

educational  system,  and  the  general  high  intelligence  of 
the  skilled  mechanic,  is  no  place  to  treat  men  like  bits 
of  machinery. 

The  handling  of  men  is  a  problem  which  tests  the  abil- 
ity of  the  employer,  and  is  one  which  is  a  great  factor  in 
the  success  of  an  enterprise.    Two  methods  are  Driving 
in  practice  for  the  handling  of  men.     The  one  ^^'  leading, 
typical  of  the  last  century  is  driving,  while  the  other, 
which  we   trust  will   be   typical   of   the   twentieth,  is 
leading.       The  ignorant  workman  may  be  Effects  of 
driven  to  his  task,  but  with  the  skilled  me-  ^^^«- 
chanic  driving  is  a  failure.     Driving  produces  discontent, 
fosters  antagonism,  and  banishes  loyalty  and  enthusiasm. 
To  understand  the  workman  is  a  most  serious  problem  for 
the  employer.    The  employer  should  be  a  close  student  of 
human  nature,  and  should  know  his  men  as  they  are,  and 
not  as  they  are  supposed  to  be.     Business  building  re- 
quires the  cooperation  of  employers  and  employees,  and 
this  demands  that  the  employee  be  led  through  self- 
interest.    The  question  of  arousing  self-interest  is  the 
great  problem  of  the  future,  and  its  successful  solution 
assures  enthusiasm,  cooperation,  and  success,  the  goals 
of  industrial  activity. 

A  workman  to  do  his  best  work  should  have  his  mind 
on  what  he  is  doing.  This  freedom  of  mind  arises 
largely  from  contentment.  Contentment  has  causes  of 
a  great  influence  upon  the  quality  of  work  as  inefficiency, 
well  as  upon  the  output.  Working  amidst  gloomy  and 
dismal  surroundings,  with  improper  equipment,  in  fear 
of  losing  position,  or  imder  constant  nagging  by  a  rough 
and  surly  boss,  causes  men  to  have  their  thoughts  on 


192  ECONOMICS  OF  BUSINESS 

everything  except  their  work,  and  their  interests  else- 
where than  on  what  they  are  doing.  The  worst  frame  of 
mind  for  good  work  is  one  of  continual  brooding  over 
being  underpaid.  In  how  many  enterprises,  do  we 
find  one  or  more  of  these  conditions  prevailing?  How 
many  enterprises  have  failed  as  a  result  of  their  presence  ? 
Employers  wonder  why  they  do  not  succeed.  They 
have  well-equipped  factories,  modern  machinery,  but 
there  is  lacking  the  contented  workman  whose  interests 
are  centered  with  those  of  the  employer  in  the  success 
of  the  undertaking. 

The  contented  employee  has  a  positive  money  value. 
Contentment  binds  employer  and  employee  closely 
Content-  together,  and  leads  to  their  cooperation  for  the 
Sctorln  success  of  the  enterprise.  Employers  as  a 
efficiency,  body  are  at  present  recognizing  the  value  of 
contentment  in  the  working  force.  Workmen  have 
benefited  by  various  improvements  made  largely  on  the 
initiative  of  employers.  These  are  all  business  invest- 
ments, and  the  contented  mind  obtained,  more  than  re- 
pays in  quahty  of  work  and  output.  Efficiency  is  a  great 
factor  working  towards  the  lessening  of  costs  of  produc- 
tion, but  it  cannot  exist  without  contentment  in  the 
working  force. 

The  industrial  struggle  is  one  for  profits,  and  the  em- 
ployer who  can  produce  at  the  lowest  cost  wins.  Em- 
ployers have  learned  that  a  very  important 
menting  factor  in  lowering  costs  is  permanence  in  the 
"*   ^*  laboring  force.     The  one  basic  principle  un- 

derlying efficiency  is  continuity  in  service.  Nothing 
so  works  against  efficiency  as  continuous  change  in  the 


LABOR  EFFICIENCY  193 

working  force.  Men,  when  they  know  that  they  are 
likely  to  be  discharged  at  any  moment,  do  not  have  the 
interests  of  the  enterprise  at  heart,  and  do  not  give 
their  best  service.  Experimenting  with  men  is  very 
costly,  and  the  less  an  employer  is  compelled  to  experi- 
ment, the  greater  are  his  chances  of  success.  During 
the  past  century,  machines  were  carefully  nurtured 
and  preserved,  but  little  attention  was  paid  to  keeping 
men  in  the  organization.  The  employer  failed  to 
realize  the  loss  resulting  from  constant  hiring  and  dis- 
missing. A  large  manufacturer  declares  that  for  every 
dollar  paid  a  new  employee  for  the  first  few  weeks, 
he  is  out  two  for  breaking  him  in.  Another  states 
that  the  breaking  in  of  a  new  employee  to  a  position 
of  any  importance  costs  two  months  of  his  time  before 
he  is  seasoned. 

Employers  have  recently  recognized  the  great  im- 
portance of  holding  men  in  their  organization.     This  is 
found  expressed  in  the  various  profit-sharing  plans,  wel- 
fare movements,  and  pension  systems  of  many  importance 
railroads  and   industrial   plants.     These   are  ^ency  hf" 
simply  inducements  to  attract  the  best  labor  service, 
and  hold  it.    All  money  spent  in  these  various  schemes 
is  good  investment,  and  the  return  coming  from  con- 
tinuity of  service,  peace  of  mind,  and  coopera-  i^duce- 
tion  repays  the  employer  a  hundred  fold.    If  an  °^ents  to 
employer  nnds  that  his  men  are  leaving,  some-   good  in- 
thing  is  wrong,  and  an  investigation  should  vestments, 
at  once  be  made.     If  there  is  a  reason  for  a  man  leaving, 
it  should  be  found  out  as  soon  as  possible,  because  it 
will  likely  drive  away  his  successor.     No  efficient  work- 


194  ECONOMICS  OF  BUSINESS 

man  should  be  allowed  to  leave,  if  reasonable  measures 
will  keep  him.  In  a  laboring  force,  continuity  of  service 
is  the  ideal,  and  employers  should  bear  in  mind  that 
permanency  and  efficiency  go  hand  in  hand. 

A  method  of  equal  importance  with  permanency, 
in  working  toward  efficiency,  is  the  policy  of  making 
Promotion  promotions  from  the  ranks.  Hope  for  the 
from  the       future  is  the  chief  incentive  for  giving  best 

ranks  m-  . 

creases  ejfforts  to  the  work,  and  the  hope  which  appeals 
effiaency.  most  Strongly,  and  which  gives  loyalty  and 
self-interest  is  advancement.  Every  organization  should 
make  provision  for  filling  any  vacancy  which  may  occur 
from  its  own  ranks,  and  the  laboring  force  should  be 
given  to  understand  that  vacancies  will  be  filled  from 
their  niunbers.  Promotion  should  not  be  based  upon 
seniority,  but  wholly  upon  ability.  Preference  to  seniority 
is  only  justified,  when  the  senior  in  service  is  of  equal 
ability  and  efficiency  with  others  qualified  for  promo- 
tion to  a  vacancy.  The  assurance  that  promotion  will 
Seniority,  be  made  from  the  ranks  fosters  ambition, 
^o^iSd^be  gives  hope  of  advancement,  and  greater  satis- 
recognized,  faction  with  present  wages.  It  encourages 
employees  in  their  work  and  arouses  loyalty  and  coopera- 
tion. Promotion  from  the  ranks  has  been  adopted 
by  many  large  railroads  and  industrial  enterprises. 
Marshall  Field  and  Company  has  only  two  managers 
who  were  not  promoted  from  the  ranks.  The  Pennsyl- 
vania Railroad  Company  rigidly  follows  this  policy 
and  one  hundred  and  fifty  of  its  one  hundred  and  sixty 
chief  officials  started  in  humble  positions.  Mr.  P.  R. 
Butler,  a  leading  manufacturer,  will  not  put  an  outsider 


LABOR  EFFICIENCY  195 

in  a  responsible  position.  The  importance  of  the  poHcy 
is  becoming  more  recognized,  and  its  extension  is  spread- 
ing to  all  fields  of  industrial  activity. 

Health  is  one  of   the  first  steps   toward  efficiency, 
and  modern  industry  demands  workmen  of  good  physique 
and   health.     Work  requiring  strength,  dex-  Efficiency 
terity,  or  brain  power  cannot  be  efficiently  heS^^y^ 
performed  in   the   absence   of   good   health,  workmen. 
The  employer  of   the   old   school   regarded   as  useless 
expense,  any  outlay  to  improve  the  conditions  under 
which  his    employees  worked,   while    the    progressive 
employer  of  to-day,  recognizes   that  money  spent   to 
maintain  sanitary  and  healthful  conditions  is  a  profit- 
able investment.     It  is  recognized  that  whatever  pro- 
motes and  assures  health  increases  the  efficiency  of  the 
working  force.     Efficiency  demands  that  work  be  per- 
formed under  the  best  sanitary  conditions  and  amidst 
the  most  healthful  environments. 

Sickness  is  one  of   the  greatest  enemies  of   the  em- 
ployer,  and  its  prevention  is  an  important  question 
which  demands  careful  consideration.     Every  int^^gst  ^f 
cause,  whether  in  factory  or  out,  that  leads  theem- 
to    ill-health    demands    close    investigation.  tendTto^" 
Light,  heat,  atmospheric  conditions,  drinking  the  homes 
water,  nutrition,  sanitary  conditions  in  work-  pioyees. 
shop  or  home  influence  health.     Home  as  well  as  fac- 
tory conditions   should   be  studied.    Lack  of    proper 
nourishment,  bad   housing,   and   of   proper    sanitation 
in    the   home   prevents    physical   efficiency  and   intel- 
lectual keenness.     Many  cases  of  illness  would  be  im- 
possible if  the  workman  were  not  devitalized  by  mal- 


196  ECONOMICS  OF  BUSINESS 

nutrition  or  lack  of  proper  home  surroundings.  The 
employer  should  extend  his  care  from  the  workshop 
to  the  homes  of  his  employees.  Every  dollar  so  spent 
is  an  investment  which  will  give  good  returns. 

Proper  medical  inspection  for  new  employees  should 
be  rigidly  enforced.  Many  slight  ailments  may  be 
„  ^.   ,        foimd  which  with  care  can  be  easily  remedied. 

Medical  •* 

care  and  All  employees  should  go  under  medical  in- 
a^necessUy    spection  at  least  once  or  twice  a  year.     Em- 

in  factory  ployers  with  many  employees  find  it  profitable 
and  home.  ,  ,       ,  ^     r        -.    . 

to  have  nurses  and  a  doctor,  not  only  for  their 

workmen,  but  also  for  their  families.  Sickness  in  the 
family  detracts  attention  from  work.  Nurses  should 
visit  the  homes  of  employees  to  see  if  there  exists  whole- 
some and  sanitary  surroundings,  and  if  proper  nourishing 
food  is  obtained.  Frequently  sickness  may  be  pre- 
vented by  giving  advice  to  well  employees  or  immediate 
attention  to  slight  ailments.  Headaches,  colds,  and  like 
ailments  prevent  efficient  work.  Simple  treatment  often 
cures  a  cold  which  otherwise  would  linger  for  some 
time.  In  case  of  sickness,  proper  treatment  reduces 
the  time  of  recovery.  Proper  precautions  and  care 
in  looking  after  the  health  of  employees  insure  a  healthy 
working  force,  a  valuable  asset  in  itself  as  well  as  the 
cause  of  a  decrease  in  the  loss  of  time  due  to  illness. 
Employers  usually  have  a  serious  problem  in  filling 
vacancies  caused  by  the  illness  and  death  of  employees. 
Proper  medical  care  lessens  the  number  of  vacancies, 
and  the  loss  arising  from  the  introduction  of  new  men 
into  the  organization.  Employees  for  some  time  were 
suspicious  of  the  interest  taken  in  them  by  employers, 


LABOR  EFFICIENCY  197 

and  it  was  hard  for  them  to  realize  that  such  interest 
was  guided  solely  by  business  motives,  and  that  they 
were  also  benefited. 

One  of  the  chief  elements  working  toward  efl&ciency, 
is  conditioning  the  air  so  that  an  individual  may  work 
under  the  most  favorable  conditions.    The  Air  and 
fact  that  there  is  an  intimate  relation  between  humidity 

demand 

the  conditions  that  surround  employees  and  special 
their  eJOSiciency  is  becoming  more  generally  ***®^**°^- 
recognized.    High    humidity    and    temperature,    un- 
pleasant odors,  fumes,  and  dust  cause  discomfort,  detract 
from  interest  in  work,  and  are  the  cause  of  low  efficiency. 
The  question  of  industrial  ventilation  is  a  factor  which 
has  been  sadly  neglected  in  the  past,  but  it  is  one,  which 
should  be  carefully  considered  by  those  who  are  endeavor- 
ing to  increase  the  efficiency  of  their  laboring  forces. 
The   two  chief  elements  of  ventilation  are  heat  and 
humidity.    Heat    combined    with    excessive  Elements  of 
humidity  causes  listlessness,  discomfort,  and  ve^tUation. 
inefficiency.     If  the  air,  on  the  other  hand,  is  dry,  it  is 
stimulating,  and  produces  nervousness  and  discomfort. 
A  factory  should  be  kept  at  a  moderate  temperature 
and  a  low  humidity  to  produce  the  best  atmospheric 
conditions  for  good  work. 

Employers  forget  that  a  workman  does  more  in  the 
morning  not  only  because  he  is  physically  fresh,  but 
because  the  air  which  he  breathes  is  fresh  and  Tempera- 
exhilarating.  There  is  no  reason  why  the  air  ^rtanTcon- 
in  the  afternoon  should  not  be  as  fresh  as  it  is  sideration. 
in  the  morning,  and  the  employer  who  solves  the  problem 
obtains  greater  efficiency  from  his  men.     An  employer 


198  ECONOMICS  OF  BUSINESS 

in  a  large  factory  could  not  get  the  same  efficiency  from 
his  men  in  the  summer  as  in  the  cooler  months.  A  few 
thousand  dollars  installed  a  system  of  electric  fans  and 
the  efficiency  was  raised  to  that  of  the  cooler  months. 
The  additional  output  paid  for  the  fans  the  first  two 
months  of  service.  A  hot,  sultry  factory  causes  a  listless, 
half-hearted  working  force,  and  as  a  result,  the  output  is 
decreased,  a  direct  loss  to  employers  in  the  case  of  day 
work  and  also  a  loss  in  the  case  of  piece  work.  In 
cool  months,  the  workman  passes  from  the  overheated 
workrooms  to  the  cool  air  outside.  His  vitaUty  is 
lowered,  and  he  becomes  an  easy  prey  to  colds  and  dif- 
ferent maladies.  The  result  is  frequent  absences,  and 
this  adds  to  inefficiency.  A  cool,  moderate  temperature 
is  what  should  be  striven  for,  in  either  summer  or  win- 
ter, and  it  is  an  important  essential  for  efficiency. 

Dust,  bad  odors,  and  fumes  are  factors  causing  dis- 
comfort and  low  efficiency.  The  air  in  a  factory  should 
Dust,  a  ^^  ^^  ^^^^  irom  du3t  and  as  odorless  as  the 
cause  of  low  air  outside.     Proper  hoods  and  fans  can  be 

aency.  ^^^^  ^^  Carry  away  dust,  while  odors  and 
fumes  can  be  abolished  with  httle  expense.  Dust  is 
a  germ  carrier,  and  in  factories  where  it  is  present,  there 
is  always  great  danger  from  colds  and  minor  illnesses, 
that  influence  the  working  efficiency  of  the  laboring  force. 

Good  Ught  in  a  factory  has  a  direct  and  important 
bearing  upon  the  health  and  efficiency  of  the  laboring 
Li  ht  •  its  force.  Light  has  an  important  effect  upon  pro- 
influence  on  duction.  It  should  be  suitable  to  the  work 
pro  uc  on.     pgj.fQj.jj^g(j^  g^^^j  sq  placed  as  not  to  cause  an 

extra  strain  to  the  eye.     Experts  have  declared  that  the 


LABOR  EFFICIENCY  199 

normal  capacity  of  factory  workers  may  vary  twenty 
per  cent  under  proper  and  improper  lighting  conditions. 
Good  light  gives  greater  output,  better  quahty,  lessens 
liability  of  accidents,  causes  fewer  mistakes,  makes  more 
cheerful  surroundings,  and  tends  to  a  better  disposition 
on  the  part  of  workmen.  Many  factors  have  a  bearing 
upon  efhciency,  and  of  these,  the  general  conditions 
under  which  a  man  works  are  of  the  greatest  importance. 
Bad  heating,  ventilation,  and  lighting  cause  not  only 
physical  discomfort,  but  affect  the  disposition,  energy, 
and  interest  of  the  men  in  their  work.  These  all  have 
a  greater  bearing  on  a  man's  efficiency  than  the  average 
employer  thinks.  The  employer  in  the  future  should 
give  due  consideration  to  all,  because  they  are  important 
cost-saving  factors  in  production. 

A  workman  to  do  justice  to  the  work  which  he  is 
doing   should   have   proper   nourishment.     Many   em- 
ployers  give   free    lunches   to   their   employees,   while 
others  give  good  wholesome  food  at  cost.     Some  find  it 
necessary  to  have  their  own  boarding  houses,   p^^^^^ 
to  insure  that  their  men  get  good  wholesome  nounsh- 
food.    A  small  item  like  furnishing  workmen 
with  plenty  of  fresh,  cool  water  repays  the  cost  mani- 
fold.    A  workman  should  have  good  health  and  the  two 
chief  essentials  are  nourishment  and  rest.     Many  em- 
ployees consider  the  interest   taken   by  employers   in 
their  mode  of  living,  as  so  much  meddhng,  and  do  not 
reaHze  that  it  is  a  business   proposition,  and  at  the 
same  time,  greatly  benefits  them  by  serving  as  a  guar- 
antee against  sickness  and  loss  of  time. 

An  important  consideration  in  every  factory  is  that 


200  ECONOMICS  OF  BUSINESS 

of  personal  safety.  All  machines  should  be  carefully 
Personal  protected,  and  rigid  measures  taken  to  pro- 
pro%t*at-  ^^^t  against  accident.  There  should  be  proper 
tention  to  provision  for  immediate  treatment  in  the  case 
of  injury.  Many  employers  find  a  nurse  and 
a  house  surgeon  necessities,  while  many  find  it  profit- 
able to  equip  and  maintain  an  emergency  hospital.  It 
is  not  imusual  to  find  the  best  mechanics  not  working 
because  they  are  suffering  from  an  infection  from  slight 
bruises  which  would  have  caused  no  trouble  if  proper 
treatment  had  been  received  at  the  time  of  injury.  The 
loss  to  an  employer  from  the  temporary  idleness  of  his 
best  mechanics  is  hard  to  estimate.  Frequently  it  de- 
lays an  order,  and  this  in  turn  causes  delays  in  other 
parts  of  a  factory.  Personal  safety  and  provision  for 
immediate  treatment  in  case  of  injury  are  necessities  in 
every  factory. 

Ejficiency  methods  have  directed  attention  to  saving, 
wherever  possible,  the  energy  of  employees.  All  energy 
Efficiency  unnecessarily  expended  in  a  factory  has  a  dis- 
sa^of  ^^^^^  bearing  upon  possible  output.  Sitting 
energy.  at  work  was  formerly  regarded  as  a  sign  of 
laziness,  but  at  present,  it  is  encouraged  wherever  it 
does  not  interfere  with  the  performance  of  work.  Chairs 
and  seats  have  made  their  appearance  in  many  factories. 
Elevators  and  escalators  are  now  frequently  used  to 
carry  employees  to  and  from  work.  They  cost  little, 
conserve  much  energy,  and  are  not  only  sources  of  com- 
fort, but  are  the  means  of  increasing  output. 

Improvements,  whether  sanitary,  educational,  or 
social  in  their  nature,  are  good  for  employer  as  well  as 


LABOR  EFFICIENCY  201 

employee.  If  an  employer  wishes  intelligent  and  effi- 
cient men,  he  should  provide  the  most  inviting  working 
conditions.     Good  washrooms,  lockers,  clean  , 

'      .  '  Improve- 

and  cheery  working  rooms  are  highly  valued  ments 
by  all  employees.    Libraries,  reading  rooms,  pfoyersa?" 
and  free  lectures  give  an  employee  an  opportu-  weu  as  em- 

.        ,,.         ,       ^  .  ployees. 

mty  to  become  more  mtelligent.  Gymnasiums, 
amusement  halls,  music  rooms,  bowling  alleys,  rest 
and  recreation  rooms  give  the  employee  good,  whole- 
some amusement,  which  rests  him  and  gives  satis- 
faction and  contentment.  All  conditions  which  affect 
thought,  interest,  attention,  and  concentration  have  a 
direct  bearing  upon  efficiency.  Working  under  im- 
perfect conditions  produces  inattention,  inaccuracy, 
and  neglect.  The  employer  forces  the  employee  into 
these  faults  through  the  bad  conditions  under  which  work 
is  done.  Blame  and  criticism  fall  upon  the  employee 
and  not  on  the  employer  where  they  rightfully  belong. 
Labor  efficiency  demands,  among  other  things,  health, 
proper  working  conditions,  peace  of  mind  and  con- 
tentment in  factory  and  out.  The  employee  should 
be  contented  and  satisfied  when  not  working,  or  his 
efficiency  in  the  factory  suffers.  Protection,  the  main- 
tenance of  health,  best  sanitary  conditions,  and  welfare 
movements  aiming  at  satisfaction  and  contentment 
have,  in  recent  years,  become  important  Demands 
factors  of  successful  management.  Efficiency  °^  efficiency, 
demands  their  presence  in  a  factory.  Employers  are 
realizing  their  bearing  upon  production  and  costs,  and 
are  taking  greater  interest  in  the  health  and  welfare  of 
the  human  element  in  industry. 


202  ECONOMICS  OF  BUSINESS 

Tardiness  in  attendance  is  a  factor  of  inefficiency  which 
every  employer  should  strive  to  reduce  to  a  minimum. 
Efficiency  demands  not  only  faithfulness  in  work,  but 
also  regularity  and  pimctuality  in  attendance.  The 
problem  of  dealing  with  tardiness  is  a  difficult  one,  and 
Tardiness  sound  judgment  should  be  exercised  in  work- 
a  cause  of  ing  out  a  systcm.  Experience  has  proven  that 
ine  ciency.  ^g^j-^^^gg  cannot  be  overlooked,  and  the  best 
way  to  deal  with  it,  is  to  make  it  unprofitable.  Fines 
are  the  commonest  means  of  enforcing  promptness.  Not 
paying  for  time  lost,  the  loss  of  a  day's  pay  if  occurring  a 
Methods  of  ^^^^^^  number  of  times,  suspension,  and  abso- 
deaUngwith   lute  discharge  are  among  the  methods  found 

tardiness.         .  ^.  x^       •  i  ^     •  c 

m  practice.  Punishment  m  some  form  is 
absolutely  necessary  in  deahng  with  certain  classes  of 
men.  No  one  method  can  be  given  as  practicable  and 
workable  in  all  estabhshments.  One  which  gives  com- 
plete satisfaction  in  one  factory  might  be  a  failure,  and 
the  cause  of  driving  good  workmen  away  in  another. 
The  employer  should  remember  that  factory  organiza- 
tion, working  conditions,  and  employees  are  never  the 
same  in  two  places.  In  deciding  upon  a  method,  due 
consideration  should  be  given  to  the  character  of  the 
employees,  whether  men  or  women,  skilled  or  unskilled, 
salaried  or  working  by  the  piece.  If  fines  are  imposed, 
the  employer  should  make  it  clear  to  the  employees, 
that  the  purpose  of  the  fines  is  punishment, 
do  with  and  that  they  are  not  a  money-making  prop- 
osition. The  only  safe  way  to  deal  with 
fines  collected  is  to  devote  them  to  some  welfare  move- 
ment for  the  employees.    If  fines  are  kept  by  the  em- 


LABOR  EFFICIENCY  203 

ployer,   it   inevitably  leads  to  antagonism,  and  works 
against  loyalty  and  cooperation. 

Every  employer  finds  it  imperative  to  adopt  some 
method  of  ascertaining  whether  or  not  an  employee 
is  punctual  in  attendance.  The  time  clock  seems  to  be 
the  favorite  method.  Metal  or  wooden  checks,  Methods  of 
timekeepers,  individual  tickets  punched  at  check^on 
entrance,  the  matter  left  to  the  direct  employees, 
supervision  of  the  foreman,  and  daily  work  cards  are 
among  the  methods  found  in  practice.  Many  claim 
that  a  check  upon  the  time,  when  a  workman  appears 
at  work  is  not  necessary,  and  only  antagonizes  him. 
In  our  industrial  system,  some  method  is  absolutely  im- 
perative, and  if  any  trouble  arises,  it  is  usually  on 
account  of  the  poor  judgment  exercised  in  fixing  the 
punishment,  or  in  the  use  of  the  fines  collected. 

Many  employers  find  it  profitable  to  encourage 
promptness  by  a  system  of  rewards.  A  very  effective 
method  is  to  take  promptness  into  consider-  p^ 
ation  in  advancement.  Some  give  cash  premi-  encouraged 
ums  and  prizes  at  the  end  of  the  year  to  all  who  ^  '®^"  ^* 
have  not  been  tardy,  while  some  base  vacations  on  the 
timekeeper's  records,  and  take  account  of  promptness 
in  awarding  time  of  vacation  with  full  pay.  Those 
employers  who  have  adopted  the  award  system  find 
it  imperative  to  have  a  system  for  punishing  tardiness. 
If  an  employee  were  tardy  once  or  twice,  with  no  chance 
of  obtaining  a  reward,  he  has  a  tendency  to  be  careless 
in  attendance  in  the  future. 

Irregularity  in  attendance  is  a  serious  problem  for 
every  employer,  and  thorough  investigation  should  be 


204  ECONOMICS  OF  BUSINESS 

made  into  its  cause.    The  chief  cause   of  irregularity 
,   .^     is  sickness,  and  the  question  to  be  answered 

Irregularity  '  ^ 

in  attend-      is,    Who    is   responsible  ?      The     employer 

"^^^'  may   be    the   cause    in    not    having    proper 

working   conditions;    if  so,    the    employee   is   not    to 

blame,   and   the    cause    should   at   once  be 
Causes. 

remedied.     On   the   part   of   the   employee, 

the  cause  may  be  lack  of  nourishment,  improper  sani- 
tary home  surroundings,  careless  exposure,  or  intem- 
perance. The  employer  should  insist  upon  proper  nourish- 
Methods  of  ment  and  proper  sanitary  surroundings.  Care- 
treatment,  less  exposure  should  be  warned  against,  and 
intemperance  should  not  be  tolerated.  The  reasons  for 
absence  from  work  are  many,  and  each  individual  case 
should  be  dealt  with  separately.  The  method  should 
vary  with  cases,  and  punishment  is  only  advisable  where 
the  cause  is  due  to  negligence,  carelessness,  or  intemper- 
ance on  the  part  of  the  employee.  Any  of  these  should 
not  be  tolerated,  and  dismissal  should  be  the  punishment 
for  the  second  or  third  offense.  The  great  safeguard 
against  irregularity  is  a  healthy  laboring  force  working 
under  sanitary  and  wholesome  conditions. 

Wages  or  remuneration  for  work  performed  is  the 

most  serious  question  of  our  industrial  system.    The 

interest  of  the  laborer  has  always  been  and 

Importance  -' 

of  wage  is  to-day  centered  in  wages.  To  discover  and 
question.  ^dopt  a  system  of  wages,  which  appeals  to 
both  employer  and  employee  as  fair  and  just,  assures 
cooperation,  contentment,  and  enthusiasm,  three  valuable 
factors  working  toward  efficiency.  If  employees  are  dis- 
satisfied with  their  wages  and  feel  that  they  are  underpaid, 


LABOR  EFFICIENCY  205 

it  causes  antagonism,  friction,  and  lack  of  interest,  three 
of  the  chief  causes  of  inefficiency.  The  great  problem 
is  to  get  a  satisfied  and  contented  laboring  force,  and 
no  factor  assists  more  in  its  solution,  than  to  have  em- 
ployees satisfied  with  their  wages. 

The  old  system  of  wage  payment  is  to  pay  an  em- 
ployee a  certain  fixed  sum  for  the  time  that  he  is  em- 
ployed in  an  enterprise.  It  was  origi-  Time 
nally  the  only  method,  and  is  still  the  most  ^*8«s. 
common  in  actual  practice.  The  wages  are  fixed  by 
bargaining  between  employer  and  employee,  and  the 
bargaining  is  done  either  collectively  with  labor  unions, 
or  by  the  individual  employee  fixing  his  wages  with  the 
employer.  In  small  factories,  where  few  men  are  employed, 
and  where  the  employer  himself  or  his  foreman  super- 
vises the  work,  the  time  wage  is  not  so  objectionable,  but 
in  the  average  factory  employing  hundreds  of  workers, 
with  no  close  supervision,  and  little  knowledge  ry  a  _ 
of  what  a  worker  produces,  the  system  is  a  tagesof 
failure.  With  no  incentive  to  diligence  in  work,  ®  wages, 
and  no  account  taken  of  what  is  done,  the  laborer  simply 
thinks  of  putting  in  his  time,  and  has  Httle  or  no  interest 
in  what  he  is  doing.  Why  should  a  man  working  for 
time  wages  do  more  than  just  sufficient  to  hold  his 
place  ?  The  good  workman  receives  the  same  pay  as  the 
man  who  wastes  his  time,  so  the  workman  has  little  to 
gain  by  putting  his  heart  into  his  work,  and  really  exerting 
himself.  Time  wages  encourage  the  laborer  either  to 
save  his  strength  for  other  things,  or  curtail  the  output 
so  as  not  to  exhaust  the  market  for  his  labor.  The  fact 
that  extra  effort,  greater  care,  or  more  interest  is  not 


2o6  ECONOMICS  OF  BUSINESS 

recognized  or  regarded  stifles  ambition,  and  destroys 
the  interest  of  the  workman  in  his  work.  The  present 
interest  in  efficiency  will  displace,  wherever  possible, 
one  of  its  enemies,  the  time-wage  system,  by  one  more 
in  harmony  with  its  attainment. 

Time  wages  cannot  be  ehminated  altogether,  because 
there  are  many  forms  of  labor  where  it  is  impossible  to 
use  any  other  method  of  paying  an  employee, 
necessary  Certam  conditions  arise  in  every  enter- 
Ten^^  prise  that  demand  time  wages,  but  where  the 
kinds  of  results  of  labor  may  be  measured  in  units  pro- 
duced, time  wages  are  usually  unsatisfactory, 
and  work  against  efficiency.  Bookkeepers,  stenog- 
raphers, firemen,  and  engineers  are  employees  who 
must  be  paid  according  to  time.  The  demands  for  dili- 
gent work  are  good  supervision,  proper  working  condi- 
tions, and  a  wage,  fair  and  just  to  both  employer  and 
employee. 

The  piece-rate  system  was  introduced  to  overcome 
the  disadvantages  of  time  wages.  The  system  antedates 
Piece-rate  the  factory  system,  but  the  development  of  the 
system.  factory  system  gave  opportunity  for  its  more 
extensive  use.  Piece  rate  includes  all  schemes  for  pay- 
ing men  for  what  they  do,  instead  of  the  time  they  work. 
The  method  is  not  adapted  to  all  kinds  of  labor,  but  only 
where  work  is  such,  as  admits  of  measuring  individual 
performance.  Piece  rate,  to  be  successful,  should  be 
J.  .  .  accompanied  by  certain  requisites.  The  re- 
fer success    muneration  should  be  fair  and  just,  and  the 

sys  em.  ^j^ployee  Supplied  with  proper  materials, 
tools,  and  equipment.     The  working  conditions  should 


LABOR  EFFICIENCY  207 

be  of  such  a  nature  that  the  employee  can  work  to  best 
advantage.  If  employers  were  fair,  and  employees 
reasonable,  the  system  would  form  the  most  efficient 
method  of  rewarding  labor. 

The  antagonism  to  piece  rate  on  the  part  of  the 
laboring  force  is  not  the  fault  of  the  system,  but  is  due 
to  carelessness,  and  stupidity  of  employers.  Reasons  for 
The  ordinary  method  for  introduction  of  the  f<J^*piecr^°* 
system  is  so  inaccurate  and  unscientific,  that  rate, 
it  largely  accounts  for  the  employees'  opposition,  and  its 
failure  in  many  instances.  The  employer  makes  what 
he  considers  a  fair  estimate  of  work,  sets  the  price  per 
unit,  and  tells  the  employee  that  he  will  be  paid  for 
what  he  does.  The  records  are  inaccurate  and  are  not 
guides  for  fixing  piece  rates.  Experience  has  proven 
that  many  employers  underestimate  employees'  effi- 
ciency, when  they  have  an  incentive  for  greater  output  as 
offered  by  piece  rate.  A  difference  as  great  as  fifty 
per  cent  in  output  has  been  found  between  time  wage 
and  piece-rate  systems.  As  a  result  of  the  incentive, 
the  employee  becomes  more  productive,  and  soon  the  em- 
ployer finds  that  the  wages  paid  are  much  higher  than 
they  were  before.  Many  employers  feel  that  a  man 
should  earn  so  much  and  no  more,  and  when  wages  from 
piece  rate  exceed  that  amount,  they  do  not  old  system 
hesitate  to  cut  the  rate.     This  always  leads  to  °^  introduc- 

r  '     •  1    -I  tion  usually 

friction,  and  the  purpose  of  the  system  is  lost,  leads  to 
Frequently  employees,  knowing  that  if  they  ^"<^*^®^- 
make  larger  earnings,  the  rate  will  be  cut,  loaf  to  pre- 
vent cutting,  and  make  their  earnings  about  as  they 
were   under   time   wages.     Under    the   old    system   of 


2o8  ECONOMICS  OF  BUSINESS 

introduction,  it  seems  impossible  to  fix  a  rate  without 
later  readjustment,  and  it  is  impossible  to  readjust 
by  cutting,  without  arousing  the  employee's  antagonism. 
The  employee  usually  considers  every  reduction  as  a 
sign  of  his  employer's  greed,  and  as  a  result  of  the 
increased  output,  many  employers  feel  angry  because 
they  think  in  the  past,  they  have  been  imposed  upon 
by  employees  loafing. 

The  average  employee  is  very  unreasonable  in  his  atti- 
tude toward  piece  rate.     He  looks  upon  a  cut  as  unneces- 

R  ttin  ^^^'  ^^^  ^^^  ^^^y  ^^  ^^  grasping  employer, 
sometimes     Frequently  a  cut  is  justifiable,  as  when  an  em- 

justifiable.  i  •    ^      j  v*  i.-L 

ployer  mtroduces  new  machmery,  or  meth- 
ods which  greatly  increase  the  output  without  extra 
effort  on  the  part  of  the  employee.  Such,  the  employee 
does  not  consider,  and  gives  no  credit  to  his  employer 
for  making  the  change.  The  success  of  the  piece-rate 
system  depends  upon  the  introduction  of  a  proper 
p^^  g^  piece   rate ;   one  which   can   be  maintained 

method  of  without  cuts.  The  problem  of  adjusting  the 
^  ^*  **  rate  is  a  very  serious  one.  The  employer 
should  expect  to  pay,  as  a  result  of  the  increased  output, 
more  than  the  ordinary  time  wage,  but  many  fail  to 
recognize  this,  and  these  should  not  have  anything  to 
do  with  the  system.  By  careful  experimentation  and 
tests,  the  time  required  to  perform  a  task  under  local 
conditions  should  be  ascertained.  The  price  per  piece 
should  be  fixed  so  as  to  give  the  average  man  his  daily 
wage,  and  to  the  more  efficient  an  excess  depending 
upon  his  efficiency.  This  rate  would  prove  satisfactory, 
increase    output,    avoid    antagonism,    and    make    rate 


LABOR  EFFICIENCY  209 

cutting  unnecessary.  If  the  employers  would  adopt 
scientific  methods  in  fij^ing  rates,  and  save  later  readjust- 
ment, success  would  follow  and  efficiency  would  result. 

The  introduction  of  scientific  methods  to  ascertain 
proper  rates  has  resulted  in  various  modifications  of 
the  piece-rate  system.     The  premium  plan,  the  bonus 
method,  the  differential  piece-rate  system,  all  have  their 
advocates  and  their  critics.     Employers  adopting  one  of 
the  scientific  systems  have  been  too  arbitrary  scientific 
in  fixing  the  task,  and  its  remuneration.     Ob-  p*®^®  '**®^* 
taining  the  time   for   the  task  is  ordinarily  conducted 
without  taking  the  employee  into  confidence,  and  in 
many  instances,   strong    opposition  arises    before   the 
system  is  adopted.     The  employer  should  realize  that  the 
employee  should  be   consulted  in  fixing  the  i^etho^jgof 
task,  as  well  as   its  remuneration.      If   this  avoiding 
is  done,  much  opposition  will  be  eliminated.  "^  *^°°* 
The  system  should  benefit  both  employer  and  employee, 
and  if  so,  the  employee  should  have  a  share  in  its  in- 
stallation.    Greater  recognition  of  the  rights  of  employees 
would  avoid  much  opposition  by  employees  to  scientific 
piece  rates. 

Profit  sharing  is  advocated  by  many  as  giving  the 
proper  incentive  to  greater  efficiency  on  the  part  of  the 
employee.    According    to    the    method,    the  Profit 
employee  receives  in  addition  to  his  wages,  a  shanng. 
share  of  any  profits  that  may  arise  in  the  business. 
It  presupposes  a  voluntary  agreement  on  the  part  of  the 
employer  to  set  aside  a  portion  of  the  profits.   Methods  of 
for  division  among  all  or  a  certain  number  of  ^^'^^s- 
employees,  as  a  stimulus  to  extra  work.     The  interest 


210  ECONOMICS  OF  BUSINESS 

of  each  in  the  profits  is  largely  influenced  by  causes  over 
which  he  has  no  control.  No  distinction  is  made  between 
good  and  poor  employees,  the  lazy  workman  receiving 
the  same  as  the  energetic.  With  such  a  system,  there 
is  little  incentive  to  the  energetic  to  put  forth  greater 
efforts,  only  to  be  forced  to  share  the  gain  with  his  lazy 
fellow  worker. 

The  average  workman  cannot  look  forward  to  a 
profit,  which  is  six  months  or  a  year  away.  Easy  work  is 
Objections  ^^^^  attractive  than  hard,  with  a  possible  re- 
to  profit  ward  to  be  shared  with  others,  many  months  in 
8  anng.  ^j^^  future.  Any  reward  which  is  remote  in 
time  of  its  application  has  relatively  little  influence  in 
determining  the  average  man's  actions.  Profit  sharing 
is  so  remote  in  its  reward,  and  based  upon  so  many 
contingencies,  that  it  gives  little  incentive  to  extra 
effort.  It  requires  a  more  immediate  direct  reward  to 
arouse  a  man  to  action. 

The  payment  of  wages  concerns  two  parties,  the 
employer  and  the  employee.  Efficiency  demands  the 
harmonious  cooperation  of  the  two,  and  this  cannot  be 
effected  by  the  mere  paying  of  wages,  or  giv- 
shouid  be  ing  a  share  in  the  profits.  The  question  be- 
fair  and  just,  ^^^^j^  ^-j^e  twois  not  SO  much  the  amount  paid, 
but  whether  or  not  the  wage  paid,  is  a  fair  and  just 
one.  No  problem  has  a  more  direct  bearing  upon 
efficiency  than  wages,  and  its  satisfactory  solution 
demands  deliberation,  tact,  and  liberality  on  the  part  of 
employers,  and  judgment  and  reasonableness  on  the  part 
of  employees.  It  is  a  recognized  principle,  that  the 
greatest  incentive  a  man  can  have  to  work  efficiently  is 


LABOR  EFFICIENCY  2u 

to   be  paid   according   to   some   scheme,   whereby  his 
remuneration  is  directly  proportionate  to  his  output. 

Satisfaction    and  contentment  arise    only  when    the 
system  of  payment  is  based  upon  paying  labor  according 
to  its  productivity.    The  average  man  should  Greatest 
be  guaranteed  a  fair  wage,  and  an  incentive  incentive 

-       ,  „  __    ,  «•   1  1  is  wages 

to  further  efforts.  To  be  successful,  such  wage  based  upon 
payment  demands  far  more  than  mere  determi-  Productivity* 
nation.  It  needs  on  the  part  of  employers,  proper 
equipment,  modern  machinery  always  in  the  best  repair, 
no  waiting  for  materials,  best  possible  sanitary  and 
working  conditions,  social  welfare  and  educational  insti- 
tutions, and  on  the  part  of  the  working  force,  loyalty, 
concentration  in  work,  diligence,  and  cooperation  for  the 
success  of  the  enterprise. 

One  factor  which   the  average  employer  overlooks, 
and  one  which  has  an  important  bearing  upon  output  is 

fatigue.     Fatigue  may  be  defined  as  weariness  ^  . 

Fatigue, 
from   bodily  or  mental  exertion.    A  certain 

amount  of  fatigue  is  necessary  in  doing  any  piece  of 
work,  and  the  aim  of  the  employer  should  be  to  make 
it  as  small  as  possible.     This  demands  a  careful  study 
of    the  methods   of  doing  work,  the  conditions  under 
which  work  is  done,  and  the  health  of  the  working  force. 
Every   unnecessary   movement   should   be   eliminated, 
as   it   takes  imnecessary    energy,    and    this    increases 
fatigue.     Many  factors,  as  properly  nurtured  ^^^^^^^  ^^ 
and  rested  employees,  proper   sanitary  con-  lessen 
ditions  and  surroundings,  and  energy-saving    ***^®* 
devices,  as  stools,  chairs,  escalators,  and  elevators,  in- 
crease the  energy  of  employees  for  productive  work. 


212  ECONOMICS  OF  BUSINESS 

It  has  been  said  that  ninety-five  per  cent  of  the  work- 
men in  the  United  States  are  doing  less  than  sixty  per 
Soldiering,  ^^^^  ^^  ^^^^  ^^^^  might  do  without  physical 
a  serious  injury  or  overexertion.  This  statement  may 
pro  em.  ^^  exaggerated,  but  it  is  nevertheless  true, 
that  one  of  the  greatest  wastes  arises  from  men  loafing 
or  idling  away  time.  The  problem  of  preventing  loafing 
or  soldiering  is  a  most  serious  one  with  every  employer. 
The  average  workman  is  naturally  inclined  to  take  things 
easy,  and  to  do  the  least  amount  of  work  necessary  to 
keep  from  getting  discharged.  This  is  one  of  the 
serious  evils  arising  from  day  wages.  When  men  are 
paid  the  same  wages,  the  more  efficient  slackens  his 
pace  to  that  of  the  lazy  fellow,  because  why  should  he 
do  more  when  he  receives  the  same  pay. 

A  great  part  of  soldiering  is  done  by  men  with  the  de- 
liberate object  of  keeping  their  employer  ignorant  of  how 

Different  ^^^^  ^^^^  ^^^  ^^  done.  Many  deliberately 
methods  of  study  how  slowly  they  can  go  and  still  convince 
so  ermg.  ^j^^.^  employers  that  they  are  going  at  a  rapid 
pace.  The  fear  of  making  a  record,  which  will  be  used 
as  a  basis  for  future  piece  rate,  causes  men  to  soldier  as 
much  as  they  dare.  They  look  upon  extra  effort  to 
Reasons  ^^^^  more  wages  as  leading  to  a  cut  in  piece 
therefor.  j-g^^g  ^s  q^^  q(  |-]jg  main  causes  of  soldiering, 
the  prevailing  fallacious  belief  among  laboring  men  that 
the  curtailing  of  output  gives  more  employment  should 
not  be  overlooked.  Frequently  men  should  not  be 
harshly  criticized,  as  they  do  the  best  they  can  under 
discouraging  conditions.  Soldiering  is  often  deliberate, 
as  wasting  time  in  order  to   make  a  job  last,  so  that 


LABOR  EFFICIENCY  213 

it  will  not  be  necessary  to  change  jobs  at  an  incon- 
venient time.  Men  are  frequently  careless  about  being 
late  in  starting  their  machines  at  the  beginning  of  work 
and  stopping  a  few  minutes  before  closing. 

Soldiering,  in  whatever  form  it  is  found,  increases 
costs,  and  its  reduction  should  demand  the  careful  atten- 
tion of  every  employer.  Its  elimination  requires  the 
cooperation  of  both  employer  and  employee,  gj.^^  ^ 
The  employer,  on  his  part,  should  remove,  of  soldier- 
as  before  explained,  all  causes  for  waste  of  "^^* 
time,  resulting  from  inconvenient  factory  equipment, 
machinery,  tools,  and  methods.  He  should  pay  his 
men  wherever  possible  by  piece  rate,  and  in  his  determi- 
nation of  the  rate,  he  should  take  special  care  that  the 
rate  is  based  on  productivity,  and  that  the  men  receive 
a  just  remuneration  for  their  efforts.  There  is  no  more 
effective  way  of  preventing  idleness  than  to  make  idlers 
losers.  Employees  on  their  part  should  be  prompt  in 
starting  work,  faithful  in  keeping  their  machines  run- 
ning at  full  capacity  while  at  work,  sincere  in  putting 
their  whole  thought  into  what  they  are  doing,  enthu- 
siastic in  their  work,  and  loyal  in  their  cooperation  with 
their  employers  for  the  success  of  the  undertaking. 

The  attitude  of  labor  has  usually  been  hostile  towards 
every  innovation  in  industry.    Workers  in  general  believe, 
often  with  truth,  but  more  frequently  with  ^^^^^ 
mistaken  ideas,  that  every  new  idea  introduced  unions  and 
is  for  the  purpose  of  increasing  profits  at  the  ^  "®°^y- 
expense  of  the  laborer's  wages.     So  it  is  with  the  Ameri- 
can trade  unionist  in  his  attitude  toward  the  eflSciency 
movement.     He  has  been  as  a  rule,  hostile  and  has  made 


214  ECONOMICS  OF  BUSINESS 

unjust  criticisms  of  methods,  about  which  he  knew  little 
or  nothing.  But  with  a  better  understanding  of  what 
efficiency  means,  this  hostility  will  ameliorate,  and  many 
unionists  will  be  won  over  to  the  side  of  the  new  movement. 
Many  believe  that  efficiency  means  the  speeding  up  of 
workers  to  a  killing  pace,  so  that  the  years  of  usefulness 
of  the  average  worker  are  lessened.  The  error  in  this 
much-quoted  statement  Hes  in  a  false  conception  of  the 
Output  in-  efficiency  movement.  It  results  in  increased 
creased         productivity,  but  this  is  not  due  to  the  worker 

through  ^  .       •^' 

conserving  consummg  extra  muscular  or  nervous  energy, 
energy.  rpj^^  elimination  of  waste  efforts  and  time,  the 
better  factory  equipment,  methods,  and  tools,  the  better 
working  conditions,  and  the  benefits  derived  from  the 
various  welfare  movements,  all  tend  to  conserve  the 
laborer's  energy  and  strength,  and  at  the  same  time 
increase  his  productivity. 

The  unionist  critics  of  the  efficiency  movement  believe 
that  it  would  substitute  the  old  system  of  individual 
Collective  bargaining,  where  the  employee  is  at  a  great 
not?bd-^  disadvantage,  for  the  modern  plan  of  collec- 
ished.  tive  bargaining,  where  the  employee  and  em- 

ployer meet  on  more  equal  terms.  The  dispute  arises 
from  unionists  considering  the  same  pay  to  men  of 
different  abilities,  a  necessary  part  of  collective  bargain- 
ing. This  is  not  necessarily  so.  The  efficiency  move- 
ment refuses  to  pay  the  drones  the  same  wages  as  those 
received  by  the  energetic  enterprising  workmen  in  the 
same  union,  but  it  does  not  object  to  the  unions  assisting 
in  fixing  the  task,  and  its  remuneration  by  collective 
bargaining. 


LABOR  EFFICIENCY  215 

If  union  labor  would  make  a  careful  study  of  the  aims 
of  the  efficiency  movement,  and  how  efficiency  is  to  be 
reached,  it  would  not  be  able  to  find  anything  harmful 
to  its  interests.  I  believe  that  it  would  be  for  the  best 
interests  of  labor  in  general  to  welcome  the  new  move- 
ment. Many  more  advanced  labor  leaders  have  come 
to  reahze  that  "the  world  does  move,"  and  that  there 
is  nothing  hurtful  to  their  cause  in  efficiency  methods. 

The  lack  of  labor  efficiency  is  recognized  to-day  as 
one  of  the  most  serious  questions  in  our  industrial  system. 
Labor  efficiency,  as  we  have  seen,  is  of  two  The  de- 
kinds,  that  for  which  employers  are  responsible  ^^^or 
and  that  due  to  the  employees.     The  em-  efficiency, 
ployer   should  make  his   equipment,  machinery,  tools, 
and  methods  capable  of  efficient  results,  but  on  the  part 
of  the  employee  efficiency  should  not  result  in  injury  or 
injustice  to  the  workingman.     This  can  only  be  accom- 
plished by  a  careful  study  of  the  employee,  and  the  devis- 
ing of  methods  of  doing  work  without  waste  of  time  or 
energy,  and  at  the  same  time,  conserving  health,  and 
physical  and  nervous  vigor.    An  imperative  demand  is 
that  justice  be  the  basis  of  relations  between  employer 
and  employee.     Justice  in  treatment  and  wages  should 
be    the    watchword.     This    brings    a    better    under- 
standing between  employers  and  employees. 
The  past  century  was  the  age  of  machinery,  ^etwee^ 

while   the   present   is   to   be  that  of  labor,  employers 

and  em- 
Employers  and  employees  are  daily  realizing  pioyees 

that  their  interests  are  not  antagonistic,  but  ^^^^f 

one,  that  they  are  working  toward  the  same 

end,    and    that    their    efforts   bring   mutual   rewards. 


2i6  ECONOMICS  OF  BUSINESS 

With  this  recognition,  the  previous  attitude  of  mutual 
suspicion  will  be  changed  to  one  of  mutual  respect,  and 
confidence. 

QUESTIONS 

1.  Account  for  the  general  lack  of  interest  taken  by  em- 
ployers in  employees  during  the  nineteenth  century. 

2.  Give  reasons  for  the  revival  of  the  apprenticeship  sys- 
tem.   In  what  way  does  the  new  system  differ  from  the  old  ? 

3.  Why  does  efficiency  demand  contentment  and  perma- 
nency in  the  working  force  ?  What  are  inducements  to  hold 
men  in  an  organization  ?    Give  estimates  of  each. 

4.  How  does  health  affect  efficiency  ?  What  factors  have 
a  bearing  upon  the  health  of  the  working  force  ? 

5.  Why  should  employers  pay  particular  attention  to  air, 
light,  odors  and  fumes  in  factories?  How  do  these  affect 
output  ? 

6.  Why  are  nurses  and  surgeons  a  necessity  in  large  fac- 
tories ?    In  what  way  do  their  services  add  to  efficiency  ? 

7.  What  bearing  have  welfare  movements  upon  efficiency  ? 
Why  are  they  guided  by  business  motives  ? 

8.  Why  are  tardiness  and  irregularity  causes  of  inefficiency? 
How  should  each  be  treated  ? 

9.  Why  is  the  wage  question  so  important  in  our  industrial 
system  ? 

10.  Name  the  different  systems  of  remunerating  labor. 
Give  the  advantages  and  disadvantages  of  each. 

11.  What  is  the  proper  method  of  introduction  of  the  piece- 
rate  system  ?  How  does  it  differ  from  the  method  usually 
found  in  practice  ? 

12.  What  are  the  requisites  for  the  piece-rate  system? 
Give  reason  for  the  antagonism  of  laborers  to  the  system. 

13.  What  is  profit-sharing  ?  Why  does  it  not  usually  give 
an  incentive  to  more  output  ? 


LABOR   EFFICIENCY  217 

14.  What  factors  affect  fatigue  ?  How  may  unnecessary- 
fatigue  be  eliminated  ? 

15.  Give  the  causes  for  soldiering?  How  may  they  be 
eliminated  ? 

REFERENCES 

H.  L.  Gantt,  "Work,  Wages,  and  Profits" ;  W.  H.  Tolman, 
"Social  Engineering";  E.  Wade  Cooke,  "Betterment"; 
J.  Hartness,  "The  Human  Factor  in  Works  Management"; 
J.  C.  Duncan,  "The  Principles  of  Industrial  Management," 
Chs.  XI,  XIV,  XV;  J.  L.  Nicholson,  "Nicholson  on  Factory 
Organization  and  Costs,"  Ch.  II;  F.  W.  Taylor,  "Shop 
Management";  W.  D.  Ennis,  "Works  Management,"  Ch. 
IV ;  H.  Diemer,  "Factory  Organization  and  Administration," 
Chs.  XXIII,  XXIV,  XXV ;  C.  U.  Carpenter,  "Profit  Making 
in  Shop  and  Factory  Management,"  Ch.  XI;  C.  B.  Going, 
"Principles  of  Industrial  Engineering,"  Chs.  VII,  VIII; 
F.  E.  Webner,  "Factory  Costs,"  Chs.  IX,  X;  F.  W.  Taylor, 
"The  Principles  of  Scientific  Management";  F.  T.  Carlton, 
"The  History  and  Problems  of  Organized  Labor,"  Chs.  VIII, 
XVII;  R.  A.  Bray,  "  Boy  Labor  and  Apprenticeship  " ;  Report 
of  the  Commissioner  of  Labor,  1910,  "Industrial  Education," 
Ch.  IV;  E.  G.  Cooley,  "Vocational  Education  in  Europe,"  Ch. 
Ill;  H.  S.  Person,  "  Industrial  Education  " ;  W.  C.  Redfield, 
"  The  New  Industrial  Day,"  Ch.  VII;  S.  Kirschbaum, "  Busi- 
ness Organization  and  Administration,"  Ch.  XII. 


CHAPTER  X 

BUYING 

The  chief  aim  in  business  is  profit  making.  Success 
is  tested  by  the  presence  of  profits.  The  business  man, 
Buying :  its  to  obtain  profits,  must  receive  for  his  goods  a 
importance.  g^J^  greater  than  what  they  cost  him.  In  every 
estabhshment  goods  are  purchased,  and  this  outlay  often 
represents  the  greater  part  of  the  costs.  To  obtain 
goods  at  the  lowest  possible  price  is  of  the  greatest  im- 
portance to  every  business  man,  and  frequently  decides 
the  success  or  the  failure  of  an  enterprise.  Good  buying 
is  a  very  important  factor  in  every  business  enterprise. 
This  is  true  in  mercantile  establishments  as  well  as  in 
manufacturing  plants.  Everywhere  the  importance  of 
good  buying  is  recognized.  By  carefully  studying 
the  experiences,  and  methods  of  successful  buyers, 
certain  underlying  principles  are  found  which  may  be  of 
service  to  the  business  man,  who  is  interested  in  the 
problem  of  buying. 

One  of  the  chief  duties  of  the  buyer  is  to  keep  his  estab- 
hshment supplied  with  sufficient  goods  to  meet  all  de- 
stock  on  mands.  The  proper  amount  of  stock  to  keep 
^^^^'  on  hand  is  an  important  question  in  every 

factory  and  store.  The  carrying  of  stock  entails  certain 
expenses,  as  interest  on  the  amount  of  capital  invested, 

218 


BUYING  219 

rent,  insurance,  and  wages  for  handling.     Overstocking 

ties  up  unnecessary  capital,  and  adds  to  the  over- 

various  expenses  of  carrying  stock.     Under-  stocking. 

stocking  in  its  turn  is  nearly  as  costly.     Lack  of  a  proper 

supply  of  materials  causes  idleness  of  men  and  machinery, 

and  adds  to  expenses.     The  keeping  on  hand  under- 

of  a  proper  supply  of  stock  is  the  task  of  the  stocking. 

buyer,   and   one   which   requires   sound  judgment  and 

the  closest  attention. 

The  buyer  should  have  some  means  of  keeping  informed 

of  the  condition  of  his  stock.     This  is  done  by  keeping 

a  perpetual  inventory.     Through  the  study  of  stock  rec- 

past  stock  requirements,  it  is  comparatively  °'*^^' 

easy  to  ascertain  the  maximum  and  minimum   limits 

of   stock  to  be  kept  on    hand.     The  stock  should  be 

kept    within    these  Hmits,  and   if   so,  overstocking  as 

well  as  understocking  is  prevented.     The  rec-  Perpetual 

ords  keep  before  the  entrepreneur  the  exact  inventory. 

condition  of  his  stock.     They  tell  him  not  only  when  and 

how  to  buy,  but  give  him  a  complete  history  of  past  years 

of  business.     They  tell  him  what  efoods  have  , 

.  Importance, 

sold  best,  the  quantities  of  sales,  and  many 

other  important  and  essential  details. 

In    large    establishments,    the    storekeeper    follows 
closely  the  record  cards,  and  when  the  minimum  is  ap- 
proached,   the   buyer   is   warned.     Sufficient  Precautions 
time  should  be  given  not  only  to  obtain  the  *<>  prevent 
goods  under  normal  conditions,  but  a  reason-  short  of 
able  length  of  time  allowed  for  unexpected  ^°^^^' 
delays.     A  buyer   should   not  unnecessarily   delay  in 
placing  an  order.    When  the  order  is  placed,  the  goods 


220  ECONOMICS  OF  BUSINESS 

should  be  followed  until  they  are  delivered  to  the  store 
or  factory.  When  the  stock  is  getting  low,  and  has 
been  ordered,  the  storekeeper  should  make  daily 
reports  to  the  buyer.  Frequently  an  abnormal  demand 
arises  and  goods  must  be  obtained  at  short  notice. 
Labor  troubles  or  other  unforeseen  delays  may  occur, 
and  prevent  goods  from  being  delivered  on  schedule 
time.  The  buyer  should  be  ready  for  such  emergencies, 
and  always  know  where  he  can  get  his  goods  on  short 
notice.  Running  short  of  materials  frequently  causes 
idleness,  and  the  shrewd  buyer  should  ever  be  ready  to 
meet  such  emergencies.  In  a  small  business  enterprise, 
the  bu}dng  is  usually  done  by  one  person,  the  proprietor. 
A  perpetual  inventory  to  guide  in  buying  is  just  as 
important  as  in  a  large  enterprise.  Large  establish- 
ments usually  have  several  buyers,  each  a  specialist 
in  buying  a  particular  kind  of  goods.  The  buyer  in  a 
large  enterprise  must,  to  a  certain  extent,  depend  upon 
the  storekeeper.  With  a  reliable  perpetual  inventory, 
and  care  in  giving  sufficient  time  for  deliveries,  supplies 
of  materials  should  rarely  be  insufficient  to  meet  all 
demands. 

A  buyer  must  possess  a  thorough  knowledge  of  his 
goods.  If  his  goods  are  finished  articles,  he  should  be 
Knowledge  acquainted  with  the  quality  of  raw  materials 
of  goods.  ^^Q^  [j^  |-jjg  making,  and  with  every  process 
in  their  production.  An  excellent  training  is  to  spend 
some  time  in  factories  producing  the  goods.  The 
buyer  is  able  to  study  the  character  of  the  raw  product 
used,  and  the  good  as  it  passes  through  stages  of 
production  and  is  thereby  better  able  to  judge  of  the 


BUYING  221 

character  of  the  j&nished  article.  Tact  in  drawing  infor- 
mation from  workmen,  cleverness  in  testing  samples  at 
different  stages  of  production,  and  close  obser-  ^jethojjs  of 
vation  of  the  finished  article  assist  in  giving  obtaining 
the  buyer  a  thorough  knowledge  of  his  goods.  °^  ^  ^^* 
Some  find  it  profitable  to  work  short  periods  in  different 
factories  producing  the  same  kind  of  goods.  Afterwards, 
frequent  visits  should  be  made  to  the  factory,  so  that 
the  buyer  may  be  kept  informed  of  any  changes  in  the 
production  of  his  goods.  Those  factories  should  be 
patronized  that  take  the  greatest  pains  in  selecting  raw 
materials,  and  give  the  greatest  attention  and  care  to 
the  different  processes  of  production.  If  .the  goods 
purchased  are  raw  materials,  the  buyer  should  be  ac- 
quainted with  their  mode  of  production,  and  the  dif- 
ferent qualities  of  goods  in  the  market.  A  thorough 
knowledge  of  goods  is  necessary  as  one  of  the  important 
essentials  of  good  buying. 

A  buyer  must  know  the  costs  of  production  of  his 
goods.     This  knowledge  is  frequently  difficult  to  ob- 
tain, as  many  manufacturers  carefully  guard  Knowledge 
their  costs  from  buyers.     A  buyer  can  usually  °^  *^°^*^* 
secure  the  costs  in  some  factory,  and  these  can  serve  as 
a   standard   for   those  unwilling  to  make  known  their 
costs,  but  producing   under   similar   circumstances.     A 
knowledge  of  costs  is  essential  to  protect  the 
buyer  from  paying  too  high  prices.     He  knows 
whether  or  not   quoted   prices  are  too  high,  and    the 
possibility  of  obtaining  better  quotations.     When  buying 
without  knowing  costs,  many  a  buyer  pays  a  higher 
price  than  if  he  had  known  costs.     A   knowledge   of 


222  ECONOMICS  OF  BUSINESS 

costs  is  a  valuable  asset,  and  essential  in  judicious 
buying. 

Every  buyer  must  pay  particular  attention  to  quality. 
How  to  get  that  quality  which  is  best  adapted,  and 
^^  most  economical  for  the  particular  purpose 

is  a  very  important  question.  In  large  enter- 
prises, it  is  best  to  have  laboratories  for  the  purpose  of 
finding  out  the  quahty  best  suited,  to  order  according 
to  specification,  and  carefully  test  all  deliveries  to  see 
Precautions  that  the  ordered  quality  or  grade  is  obtained. 
^^*°  An  entrepreneur  in  a  small  establishment  may, 
quality.  at  the  cost  of  a  few  dollars,  equip  himself  with 
a  small  laboratory.  Under  no  circumstances  should  the 
careful  testing  of  goods  on  delivery  be  neglected,  for  it  is 
the  only  guarantee  that  the  quality  ordered  is  obtained. 
The  same  precautions  should  be  taken  by  wholesale  and 
retail  establishments.  More  and  more  attention  is 
being  paid  to  ordering  goods  according  to  quality. 
Many  establishments  have  a  testing  laboratory  where 
goods  delivered  are  tested  as  to  quality,  before  they  are 
allowed  to  go  to  the  storeroom.  If  care  is  not  exercised 
in  receiving  goods,  a  poorer  grade  may  be  substituted. 
An  inspecting  and  testing  system  is  absolutely  necessary, 
and  pays  for  itself  several  times  during  a  year. 

A  buyer  must  thoroughly  know  the  markets  which  he 
enters.  This  demands  careful  and  constant  study  of 
Knowledge  everything,  which  may  directly  or  indirectly 
of  markets,  affect  the  supply  and  demand  for  his  goods. 
The  relation  of  employers  and  employees  in  the  factories 
producing  his  particular  line  should  be  carefully  studied. 
Are  trade  unions  active,  are  employees  properly  paid,  well 


BUYING  223 

« 

treated  and  satisfied,  is  there  any  likelihood  of  a  strike, 
— these  are  some  of  the  local  questions  which  should 
be  answered.  Are  there  pohtical  dissensions  in  any  part 
of  the  world  which  may  result  in  war  ?  If  so,  would  it 
directly  or  indirectly  affect  the  market  for  his  goods? 
Do  raw  materials,  grown  annually,  or  minerals  form  a 
large  item  in  the  cost  of  production  ?  If  true  in  the  first 
instance,  an  intimate  knowledge  should  be  obtained  of 
the  acreage,  conditions  while  growing,  and  crops  in  the 
producing  countries  of  the  world,  and  how  the  pro- 
duction affects  the  world's  market.  If  true  in  the 
second  case,  what  circumstances  might  arise  to  affect 
the  supply  and  demand,  and  so  react  on  the  price 
of  the  buyer's  particular  goods  ?  This  is  not  necessary 
where  the  raw  materials  form  only  a  small  item  in  the 
expense  of  production,  as,  for  example,  the  price  of  steel 
for  making  the  works  of  watches.  Records  may  be 
obtained  from  reKable  trade  and  financial  journals  as 
well  as  from  numerous  reports  appearing  from  time 
to  time.  These  should  be  read  and  studied.  Every 
buyer  should  not  only  carefully  read  reliable  trade 
journals,  but  also  the  leading  financial  papers  to  keep  in 
touch  with  the  general  trend  of  markets.  An  intimate 
knowledge  of  all  the  circumstances  affecting  the  market 
price  of  his  goods  is  essential  for  every  buyer. 

A  buyer  in  many  instances  must  have  an  intimate 
knowledge    of    conditions    affecting   markets    of    other 
goods  than  those  which  he  buys.     This  is  par-  Knowledge 
ticularly  true  when  the  raw  product  forms  ofSdi^ert^ 
a   large   part   of   the   finished   article.     The  goods, 
buyer  of  flour  should  have  as  intimate  a  knowledge  of  the 


224  ECONOMICS  OF  BUSINESS 

wheat  market  as  he  has  of  the  flour  market.  A  change 
in  the  price  of  wheat  soon  affects  the  price  of  flour. 
Frequently  study  must  be  given  to  more  than  one  addi- 
tional market.  The  buyer  of  shoes  should  not  only  have 
an  intimate  knowledge  of  the  leather  market,  but  also 
that  of  raw  hides,  whereas  the  buyer  of  hams  should 
pay  particular  attention  not  only  to  live  hogs,  but  also 
grain.  Frequently  through  an  intimate  knowledge  of 
the  market  of  an  article  used  in  making  the  finished 
product,  a  buyer  is  able  to  forecast  a  change  in  price 
of  his  particular  good  which  enables  him  to  purchase 
more  judiciously,  and  increase  profits. 

An  intimate  knowledge  of  market  conditions  allows 
the  forecasting  of  future  supply  and  demand.  If  prices 
are  high,  and  there  is  every  indication  of  an  extra  supply, 
Forecasting  ^  buyer  Can  profit  by  buying  in  such  quantities, 
of  supply  as  are  just  necessary  to  meet  demand,  and 
order  frequently.  If  prices  are  low,  and  there 
is  indication  that  demand  over  supply  will  increase  in 
the  near  future,  a  buyer  can  take  advantage  and  buy 
large  quantities  of  staples,  but  extra  precaution  should 
be  taken  in  buying  non-staples.  The  ability  of  a  buyer 
to  forecast  future  prices  is  a  very  valuable  asset  and  may 
lead  in  the  course  of  a  year  to  valuable  additions  to 
profits. 

The  management  of  an  enterprise  should  at  all  times 
keep  the  buyer  informed  of  the  condition  of  its  finances. 
J  ,  It  is  necessary  for  a  buyer  to  know  whether 
of  firm's  he  is  required  to  buy  everything  on  time,  or 
^*^*"*^®^*  part  on  time  and  part  for  cash .  D uring  certain 
months,  a  firm  maybe  able  to  allow  its  buyer  to  buy  a  large 


BUYING  225 

part  for  cash.  The  buyer  should  be  so  informed,  because 
he  may  be  able  to  place  his  orders  where  more  favorable 
discounts  may  be  obtained.  Many  firms  make  a  serious 
mistake  in  withholding  from  the  buyer  the  true  state 
of  finances.  With  low  prices,  the  buyer  should  know 
how  much  can  be  bought  without  embarrassing  his 
firm.  Frequently  he  overbuys,  beHeving  that  finances 
warrant  it,  and  when  payments  come  due,  embarrass- 
ment arises,  and  it  would  have  been  better  to  have  kept 
the  stock  within  normal  limits. 

Promptness  in  filling  orders  is  an  important  question 
for  a  buyer  to  consider.  Some  firms  are  more  prompt 
than  others  in  filling  orders  and  shipping  ^^^  ^^^^^ 
goods.  The  buyer  in  making  his  study  of  the  in  filling 
different  firms  offering  his  goods  should  pay  at- 
tention to  promptness.  The  fact  that  a  firm  is  punc- 
tual in  filling  orders,  or  lax  is  valuable  information. 
Whether  goods  are  to  be  received  within  reasonable  time, 
or  only  when  the  shipper  feels  Hke  shipping  is  important 
for  the  buyer  to  know.  Frequently  it  is  necessary  to 
place  an  emergency  order,  and  it  is  important  to  know 
whether  or  not  a  firm  can  be  reHed  upon  to  rush  the 
order.  In  most  cases,  time  of  deHvery  is  an  im- 
portant consideration.  Too  great  tardiness  in  filling 
orders  may  lead  to  idleness  of  factory,  or  lack  of  stock 
on  the  shelves.  The  buyer  should  not,  unless  absolutely 
necessary,  patronize  a  firm  where  lax  methods  exist 
in  filling  orders,  or  shipping  goods. 

The  buyer  must  know  the  location  of  the  business 
estabHshments  of  the  different  sellers  which  he  pat- 
ronizes.     Some  are  located  at  a  distance,  while  others 

Q 


226  ECONOMICS  OF  BUSINESS 

are  near  his  business  enterprise.  What  are  the  means 
Knowledge  of  transportation,  water,  rail,  or  part  by  one, 
goods  are  ^nd  part  by  the  other,  should  be  considered, 
shipped.  Water  transportation  takes  more  time 
and  is  more  subject  to  delays  than  rail.  In  the 
case  of  rail,  do  goods  come  through  or  is  it  neces- 
sary to  reship?  In  the  latter  case,  delays  frequently 
occur.  The  different  roads  over  which  goods  are  shipped 
should  be  considered.  Some  roads  are  careful  in  handling 
freight,  while  others  are  careless  about  side-tracking 
cars  and  causing  unnecessary  delays.  Firms  differ 
in  keeping  their  word.  One  may  be  depended  upon 
How  firms  ^^  ^^  ^^  ^^  ^^y^'  while  another  pays  little 
keep  prom-  heed  to  its  promises.  A  buyer  should  know 
the  reliability  of  a  firm,  and  to  what  extent, 
it  may  be  depended  upon  to  keep  its  word.  A  buyer 
knows  what  dependence  can  be  placed  upon  the  word 
of  firms  from  whom  he  has  done  buying.  If  it  becomes 
advisable  to  give  an  order  to  a  new  firm,  he  can  easily 
find  customers,  and  a  few  questions  will  suffice  to  ascer- 
tain what  dependence  can  be  placed  upon  its  promises. 
Occasions  frequently  arise,  where  a  buyer  finds  it  very 
important  to  know  what  reliance  can  be  placed  upon 
a  firm's  word. 

Firms  differ  in  their  carefulness  in  filling  orders. 
Some  have   a  rigid  inspection   system,  insuring    that 

efuiness  ^^^^  goods  ordered  are  sent,  and  that  these 
infilling  are  of  the  highest  quality.  Others  have 
°'  ®'^*  lax  or  no  inspection  methods,  and  a  buyer 

cannot  rely  upon  getting  the  goods  ordered,  and  only 
knows  what  he  will  get  when   the  goods  are  actually 


BUYING  227 

delivered.  Delays  are  frequent  from  having  the  wrong 
goods  or  qualities  sent.  It  pays  a  buyer  to  visit  the 
establishments  of  as  many  as  possible  of  those  he 
patronizes,  and  among  other  things,  to  carefully  note  the 
care  taken  in  fiUing  orders,  and  the  means  adopted  to  see 
that  only  goods  ordered  are  sent.  Patronage  should 
be  given  only  to  firms  who  pay  particular  attention  to 
the  filling  of  orders,  and  who  possess  a  rigid  inspection 
system. 

A  buyer  must  follow  inventions  and  improvements 
affecting    the   making    of    his   goods.     New   machines 
may  be  invented  or  new  processes  discovered  Knowledge 
which  produce  a  better  srrade  of  goods.     A  ofinven- 

,  -,     ,  ,      .        ,  .  ,  ,  tionsand 

buyer  can  profit  by  placmg  his  orders  where  improve- 
new  machines  or  new  processes  are  in  operation.  ™®°*^- 
One  firm  may  make  an  improvement  in  putting  a  partic- 
ular good  in  a  more  attractive  form.  This  a  buyer  should 
know,  because  such  a  form  may  be  the  means  of  increasing 
the  demand  for  and  sale  of  the  good.  A  buyer  should 
carefully  follow  the  methods  of  producers  of  goods  that 
he  buys,  to  see  that  they  are  alert  to  the  introduction  of 
new  machines  and  processes  for  improving  the  quality  of 
their  product. 

Buyers  of  particular  goods,  especially  those  confined 
to  style,  as  clothing  and  millinery,  usually  make  periodi- 
cal visits  to   style   centers.     They  carefully  Buying  of 
study   the   various  styles,    and   select   those  pending^" 
which  they  consider  suited  to  their  customers,  ^poii  style. 
The  better  a  buyer  knows  the  tastes  of  his  customers, 
the  better  able  is  he  to  make  selections  which  will  readily 
sell.     Profits  in  such  cases  largely  depend  upon  judicious 


228  ECONOMICS  OF  BUSINESS 

buying.  Judicious  buying,  in  its  turn,  is  based  upon 
the  buyer's  knowledge  of  his  customers,  and  his  ability 
to  choose  styles  that  will  suit  their  taste.  With  com- 
petition so  keen,  misjudgment  as  to  style,  and  quantity 
needed  may,  at  the  end  of  the  season,  show  few  sales  and 
quantities  of  out-of -season  goods  on  hand.  This  means 
loss.  The  successful  buyer  is  the  one,  who  is  able  to 
judge  what  styles  sell  best,  and  his  success  depends  upon 
his  forecasting  as  nearly  as  possible  the  demand,  and 
being  out  of  stock,  when  the  season  is  over.  The  buy- 
ing of  goods  depending  for  their  demand  upon  style  is 
the  most  difficult  task  in  buying.  The  only  rule  which 
can  be  laid  down  is  to  suit  the  customers,  and  try  to 
read  their  tastes.  The  success  of  many  firms  depends 
upon  ability  to  read  human  nature,  and  sound  judg- 
ment in  choosing  what  will  sell. 

Goods  may  be  divided  into  two  classes,  —  staples  and 
non-staples.  Staples  are  those  goods  which  are  in  con- 
stapies  and  stant  use  and  which  possess  a  continual  de- 
non-stapies.  mand.  Non-staples  are  those  depending  for 
their  demand  upon  whims,  fads  or  fashion.  The  de- 
mand for  such  goods  is  very  fluctuating.  It  often  in- 
creases in  a  short  time  from  nothing  to  a  large  amount, 
and  frequently  declines  as  rapidly  as  it  came  into  ex- 
istence. Goods,  like  Christmas  and  Easter  decorations, 
possessing  only  a  seasonal  demand,  should  be  classed  as 
non-staples. 

The  skill  of  a  buyer  is  tested  in  buying  non-staples. 
Buying  non-  Nowhere  does  financial  success  depend  so  much 
staples.  upon  good  buying.  To  have  goods  on  hand 
when  a  fad  starts,  and  be  sold  out  when  the  fad  goes  is 


BUYING  229 

the  goal  of  every  buyer.  The  nearer  a  buyer  reaches  this 
goal,  the  greater  are  his  profits.  When  a  fad  disappears, 
if  many  of  the  articles  are  on  hand,  it  represents  a  loss. 
These  must  be  sold  at  a  discount,  and  frequently  at  only 
a  fraction  of  their  original  cost.  It  must  be  admitted 
that  there  is  considerable  guesswork,  and  also  that  luck 
plays  a  very  important  part.  Nevertheless,  a  careful 
study  of  the  customers,  their  wants,  desires  and  wishes, 
materially  assists  a  buyer  in  forecasting  demand. 

A  great  temptation  open  to  all  buyers,  and  one  which 
many  are  not  able  to  resist,  is  overbuying.     The  over- 
buying  habit   is    dangerous,  and   frequently  leads    to 
bankruptcy.    The    buyer    of    staples    may,  over- 
through  the  inducement  of  low   prices,  buy  ^"y»^g- 
more  than  necessary  to  meet  present  needs.     Precaution 
should  be  exercised,  and  it  is  not  even  safe  to  greatly 
overstock,  it  matters  not   how  great   the   temptation 
to  do  so  may  be.     The  carrying  of  stock  entails  ex- 
penses, and  there  is  also  danger  of  deterioration.     Many 
staples  must  be  disposed  of  within  a  certain  time,  or  they 
deteriorate   in   value.     The   question   of   possible    de- 
terioration with  time  is  a  very  important  one  Liniitations 
to  consider,  and  one  which  is  frequently  neg-  on  over- 
lected.    The  time  for  payment  for  goods  always 
comes.     Many  buyers  do  not  consider  this  and  hardships 
frequently  arise  in  raising  the  payments  for  surplus  stock. 
The  question  of  the  extent  of  overstocking  through  the 
temptation  of  low  prices  is  a  difficult  one.     In  every  case, 
it  is  speculation,  and  extreme  care  should  be  exercised  in 
extending  stock  beyond  that  which  can  be  disposed  of 
in  a  certain  period.    The  question  of  overbuying  should 


230  ECONOMICS  OF  BUSINESS 

not  be  undertaken  at  haphazard,  but  careful  study  should 
be  made  of  the  nature  of  the  good,  its  liability  to  deterio- 
rate, and  the  financial  means  of  the  firm.  These  ques- 
tions should  be  carefully  considered  by  the  buyer,  and 
he  should  weigh  each  one  separately  before  he  is  too 
strongly  tempted  by  low  prices. 

Goods  which  are  not  subject  to  deterioration  with 
time  may,  if  finances  warrant,  be  bought  in  large  quan- 
When  over-  ^^^^^  when  prices  are  low.  Many  business 
buying  is  men,  using  large  quantities  of  such  staples, 
JUS  a  e.  ^^  .^  profitable  to  build  special  storehouses 
for  storing  surplus  stock.  Though  an  article  may  not 
deteriorate,  yet  with  all  articles  there  is  more  or  less 
expense  in  carrying.  The  question  of  the  ability  of 
the  entrepreneur  to  successfully  finance  overstocking  is 
an  important  problem.  Many  a  buyer  in  his  eager- 
ness to  overstock,  and  take  advantage  of  what  he 
considers  a  favorable  time  to  make  profits,  buys  such 
quantities  that  he  later  faces  financial  difficulties  in 
paying  for  them.  The  question  of  funds  should  always 
be  kept  in  the  foreground,  and  no  buyer  is  justified  in 
buying  beyond  the  financial  means  of  his  firm. 

Many  staples,  as  wheat,  cotton,  barley,  etc.,  may  be 
bought  for  delivery  any  month  in  the  year.  This 
Buyin  on  saves  the  buyer  the  expense  of  carrying,  but 
future  in  studying  the  prices  for  future  delivery,  such 

^  ^*'^*  expense  should  be  given  careful  consideration. 
In  buying  for  future  delivery,  too  much  emphasis  cannot 
be  placed  upon  a  careful  study  of  all  conditions  that 
might  affect  the  market.  To  estimate  the  influence 
of  future  happenings  upon  the  relation  between  supply 


BUYING  231 

and  demand  is  the  chief  business  of  brokers.  Buyers  also 
find  it  profitable  to  carefully  follow  all  conditions  that 
might  possibly  affect  the  market  of  their  goods,  and  esti- 
mate their  influence.  Careful  study  and  sound  judgment 
in  forecasting  the  future  often  enables  a  buyer  to 
increase  his  profits  by  judicious  buying.  Every  buyer 
should  be  a  careful  student  of  sources  of  supply,  and 
able  to  analyze  all  conditions  that  might  affect  supply 
or  demand. 

If  care  should  be  exercised  in  overbuying  staples, 
extreme  care  must  be  taken  with  non-staples.  Low 
prices  are,  as  a  rule,  traps  to  ensnare  the  un-  overbuying 
wary.  If  large  discounts  and  low  prices  are  i^on-stapies. 
offered,  it  is  well  to  be  cautious,  because  these  inducements 
are  usually  for  the  purpose  of  selling  stock  for  which  the 
demand  will  Hkely  fall  in  the  near  future.  When  the 
style  of  shoes  changed  a  few  years  ago  from  the  narrow 
toe  to  the  broad,  manufacturers  having  a  large  quantity 
of  narrow  shoes  in  stock,  and  foreseeing  the  change  in 
style,  offered  inducements  at  low  prices  and  more  favor- 
able discounts.  Many  merchants  were  ensnared,  and 
bought  large  quantities.  Before  the  goods  were  de- 
livered the  new  style  came  in,  and  when  the  goods  were 
received,  many  were  offering  them  on  bargain  counters 
at  far  less  than  what  was  paid  for  them.  Many  paid 
dearly  for  their  experience,  of  being  too  easily  tempted 
by  low  prices.  With  all  goods  except  staples,  it  is  always 
the  greatest  kind  of  risk  to  overbuy.  No  one  can  tell 
when  demand  will  change,  and  sometimes  it  only  takes 
a  short  time  for  it  to  almost  cease.  Good  buyers  of 
non-staples  are  never  tempted  to  overbuy  by  low  prices 


232  ECONOMICS  OF  BUSINESS 

or  large  discounts.  They  have  the  demand  for  their 
goods  carefully  forecasted,  and  they  stand  rigidly  to  it. 
Low  prices  are  only  a  trap  for  the  young  and  untrained 
buyer,  and  few  escape  without  paying  dearly  for  their 
lesson. 

Every  retail  business  caters  to  a  different  class  of 
customers.  It  will  not  do  to  study  the  wishes  of  one 
Retail  busi-  class,  and  draw  conclusions  for  others.  Each 
ness  caters    ^lass  should  be  Separately  studied,  because  the 

to  different       ,  ,  r-  j  j  ^ 

classes  of  demands  of  all  are  not  the  same.  Some  busi- 
customers.  ^^^^  enterprises  cater  only  to  the  well-to-do 
and  wealthy,  while  others  obtain  their  trade  chiefly  from 
the  middle  classes  and  laborers.  The  quality  and  grade 
of  goods  should  in  each  case  suit  the  class  of  customers 
served.  In  a  haberdashery  serving  only  wealthy  people, 
it  may  not  pay  to  keep  neckties  of  a  quality  that  sell  for 
less  than  seventy-five  cents,  while  in  another  store,  it 
may  not  pay  to  keep  such  expensive  ties.  The  important 
question  is  what  class  of  customers  is  served,  and  every 
effort  should  be  made  to  cater  to  their  desires,  wishes  and 
sometimes,  even  whims. 

A  buyer  for  the  retail  trade  should  buy  to  suit  his  cus- 
tomers and  not  to  please  himself.  Many  buyers  are 
Buyers  hampered  in  their  success  by  paying  heed  to 

to^s^t^eir  ^^^^^  ^^^^  ^^^s  ^^^  dislikes,  and  neglecting 
customers,  those  of  their  customers.  A  buyer  should 
always  remember  that  the  customer  is  the  one  to  be 
pleased  and  satisfied,  and  to  bear  that  in  mind  in  bu3dng. 
Buying  that  which  will  not  sell  is  loss,  and  in  order  to 
sell,  a  good  must  satisfy  and  please,  not  the  buyer,  but 
the  customer.     Some  buyers  mingle  with  their  customers 


BUYING  233 

and  by  questions  learn  their  desires,  while  others  rely 
upon  clerks  to  learn  their  likes  and  dislikes.  Some 
method  should  be  adopted  and  carefully  followed,  because 
no  buyer  can  rely  upon  guesswork  to  guide  him  in 
buying. 

The  problem  of  deciding  what  goods  to  carry  in  stock 
is  an  important  one.  If  sound  judgment  is  not  exercised, 
the  shelves  may  soon  be  filled  with  unsalable  ^^^^  ^^^^ 
goods.  Clerks  are  usually  required  to  note  to  carry  in 
goods  asked  for  and  not  in  stock.  It  does  not 
always  pay  to  add  every  article  asked  for.  Before  an 
addition  is  made,  sound  judgment  should  be  exercised 
and  careful  study  made  of  conditions  in  order  to 
forecast  the  demand.  In  forecasting  the  demand, 
assistance  is  given  by  knowing  the  number  asking  for  an 
article  during  a  certain  period.  A  buyer  should  be 
sufficiently  acquainted  with  his  class  of  customers  to 
judge  the  possibility  of  their  buying  any  new  article  or 
brand,  if  kept  in  stock.  A  particular  article  or  brand 
may  be  asked  for  and  wanted  by  only  a  few  customers. 
The  small  amount  sold  will  not  pay  for  the  expense  of 
carrjdng  the  stock.  Again,  there  may  be  an  article,  at 
present,  asked  for  by  only  a  few,  but  by  growing  in  favor 
may  in  a  short  time  be  in  great  demand.  The  wis- 
dom of  the  buyer  in  deciding  this  question  may  often 
result  in  greatly  increasing  profits.  The  presence  of  an 
article  or  brand  in  a  store  may  be  the  means  of  attracting 
people  to  the  store  to  buy  other  goods.  It  may  not 
pay  to  carry  it,  but  goods  sold  through  its  presence  may 
pay  to  keep  it  on  the  shelves.  If  careful  study  is  not 
made  as  to  future  demand,  and  articles  are  added  with- 


234  ECONOMICS  OF  BUSINESS 

out  thought,  great  losses  may  arise.  New  articles  are 
added,  called  for  by  a  few,  and  the  demand  ceases.  The 
remainder  must  be  disposed  of  at  the  bargain  counter. 
Go  into  any  store,  look  over  the  bargain  counters,  and 
you  will  see  hundreds  of  instances  of  bad  judgment  in 
forecasting  future  demand.  Each  mistake  in  forecasting, 
and  adding  unsalable  goods  adds  to  costs  and  lessens 
profits.  The  success  of  many  retail  stores  depends  far 
more  upon  careful  and  judicious  buying  than  upon  selling. 

QUESTIONS 

1.  What  place  has  bu)dng  in  our  industrial  system  ?  Men- 
tion the  ways  in  which  buying  may  assist  in  lowering  costs. 

2.  What  is  the  purpose  of  cost  records?  Give  the  impor- 
tance of  maximum  and  minimum  limits. 

3.  What  expenses  are  incurred  in  carrying  stock  ?  When 
are  these  to  be  considered  by  the  buyer  ? 

4.  What  precaution  should  be  taken  to  assure  sufl&cient 
stock  to  meet  demands  ?  What  losses  arise  when  stock  runs 
short  ? 

5.  What  knowledge  of  goods  is  necessary  in  buying  ?  How 
is  it  acquired  ? 

6.  Give  the  advantages  arising  from  knowledge  of  costs 
of  goods.     How  may  costs  be  obtained  ? 

7.  What  savings  arise  from  buying  goods  according  to 
quality?  What  precaution  should  be  taken  to  assure  that 
the  quality  ordered  is  obtained  ? 

8.  Explain  why  it  is  necessary  for  a  buyer  to  know  the 
market  in  which  he  buys.  Mention  several  conditions 
which  affect  markets. 

9.  What  is  the  basis  for  forecasting  supply  and  demand  ? 
In  what  way  may  forecasting  be  of  service  to  the  buyer  ? 


BUYING  235 

10.  What  knowledge  of  his  firm  should  a  buyer  possess? 
Mention  the  advantages  that  may  arise  from  such  knowledge. 

11.  Why  is  it  important  to  know  promptness  in  filling 
orders,  route  of  shipment  of  goods,  and  the  keeping  of  prom- 
ises by  the  seller  ? 

12.  What  advantages  arise  from  a  buyer  keeping  himself 
informed  of  new  inventions,  methods  and  processes  in  the 
making  of  his  goods  ? 

13.  What  is  the  difference  between  staples  and  non-staples  ? 
Mention  considerations  that  assist  in  buying  non-staples. 

14.  What  inducements  lead  to  overbuying  ?  What  limit 
should  be  placed  on  overbuying  ? 

15.  Mention  the  advantages  arising  from  a  careful  study 
of  customers.  What  should  decide  the  goods  to  carry  in 
stock  ? 

REFERENCES 

W.  D.  Ennis,  "Works  Management,"  Ch.  V;  H.  Diemer, 
"Factory  Organization  and  Administration,"  Ch.  XII; 
F.  Farrington,  "Store  Management,"  Ch.  IV;  "Buying," 
Business  Man's  Library,  Vol.  V;  S.  C.  C.  Parson,  "Business 
Administration,"  Ch.  XI. 


CHAPTER  XI 

SELLING 

Goods  are  produced  in  order  that  human  wants  may 
be  satisfied,  directly  or  indirectly,  through  their  con- 
-,    .  sumption.   People  engage  in  their  production, 

produced  either  for  home  consumption,  or  for  disposal 
to  others.  A  hundred  years  ago,  the  common 
custom  was  to  produce  in  the  homes  a  large  part  of  the 
goods  needed  for  home  use,  but  the  past  century  has 
introduced  such  industrial  changes,  that  to-day  people 
depend  on  others  for  goods  to  satisfy  their  wants.  The 
production  of  goods  for  sale  is  the  fimdamental  purpose 
of  our  industrial  system,  and  the  basic  structure  of  all 
business  activity. 

Men  engage  in  business  for  profit-making.  Profits 
depend  upon  careful  buying,  low  cost  of  production,  and 
Importance  good  Selling.  Carelessness  or  bad  judgment 
of  selling.  ^  q^q  jg  sufficient  to  eliminate  profits,  and 
force  an  enterprise  into  bankruptcy.  The  materials 
used  may  be  carefully  bought,  and  the  finished  article 
produced  at  low  cost,  but  in  order  that  profits  may  exist, 
the  finished  article  must  be  sold  at  a  price  greater  than 
the  cost  of  production.  The  manufacturer  of  a  new 
article  should  decide  before  he  builds  his  factory  the 
possible  demand  for  his  goods,  and  if  sufficient  can  be 
sold  to  pay  for  production.     It  is  nonsense  to  produce 

236 


SELLING  237 

an  article  which  cannot  be  sold.  If  a  manufacturer 
wishes  to  enlarge  his  plant,  he  should  carefully  consider 
the  demand  for  his  goods  and  find  out  if  the  demand 
can  be  increased  to  take  the  increased  production  at  a 
profitable  price.  The  existence  of  every  enterprise 
depends  upon  the  abihty  of  the  entrepreneur  to  dispose 
of  his  product.  Selling  is  a  very  important  factor  in 
every  business.  Too  great  emphasis  cannot  be  placed 
upon  its  importance,  for  upon  it,  frequently  depends  not 
only  the  success,  but  the  very  existence  of  an  enterprise. 

An  important  problem  for  every  manufacturer  is  the 
disposal  of  his  product.  Buyers  must  be  found,  and  in 
reaching  them  various  means  may  be  used,  as  Methods  of 
salesmen,  letters  or  circulars,  advertising,  selling, 
retail  stores  owned  by  the  manufacturer,  and  independ- 
ent agents.  Careful  study  should  be  made  of  the 
article  to  be  sold,  and  the  method  adopted  should  be  the 
one  best  adapted  to  the  article,  the  most  economical, 
and  at  the  same  time  sufficiently  extensive  to  dispose  of 
the  product  of  the  factory. 

Customers  may  be  divided  into  three  general  classes, 
—  jobbers,    retailers    and    consumers.      Manufacturers 
may  sell  to  one,  two  or  all  three  classes.    A  classes  of 
jobber  is  one  who   buys  in  large  quantities,  customers, 
in  order  to  sell  to  the  retailer  in  smaller  quantities. 
His  business  is  not  concerned  with  selling  directly  to 
consumers.    When  he  does,  he  is  engaged  in 
the  retail  as  well  as  the  wholesale  business. 
Jobbers  are  known  under  various  names,  as  wholesale 
merchants,  commission  merchants,  commission  brokers, 
and  exclusive  agents.     Many  manufacturers  sell  only  to 


238  ECONOMICS  OF  BUSINESS 

jobbers,  and  trust  to  them  to  dispose  of  their  goods. 
They  do  not  compete  with  them,  by  selling  to  retailers 
or  to  consumers.  Jobbers  usually  handle  the  products 
of  many  firms,  and  are  supposed  to  give  equal  support 
to  all  products,  but  they  frequently  fail  to  do  so.  Some 
goods  carry  larger  profits,  and  the  less  paying  are  neg- 
lected for  these. 

The  development  of  the  departmental  store,  and  the 
extensive  use  of  advertising  has  increased  the  number 
of  manufacturers  selling  directly  to  retailers  and  con- 
.  sumers.    The  jobber  has  in  many  instances 

a  necessity  been  eliminated,  but  nevertheless  he  still  con- 
MtdisS^"  tiiiu^s  to  be  an  important  factor  in  business, 
utingsys-  As  long  as  small  retail  stores  continue  to  do 
business,  the  jobber  will  thrive.  He  replen- 
ishes the  merchant's  small  stock  and  saves  ordering 
directly  from  the  manufacturer.  As  a  rule,  the  pur- 
chases are  not  large  enough  to  buy  direct,  and  if  the  man- 
ufacturer is  some  distance  away,  the  merchant  does  not 
wish  to  wait  for  his  goods  when  he  can  obtain  them 
at  short  notice,  and  as  cheaply  from  a  jobber.  In  the 
city  of  New  York,  departmental  stores  have  not  les- 
sened the  number  of  small  retail  stores,  and  the  jobber 
continues  to  be  an  important  link  between  retailer 
and  producer.  He  performs  an  important  work  and  is 
a  necessity  in  the  present  distributing  system. 

Retail  merchants  are  those  who  buy  in  order  to  sell  di- 
rectly to  consumers.  They  may  purchase  their  goods 
RetaU  fromeither  jobbers  or  manufacturers.   Thesize 

merchants  Qf  thefr  estabhshments  varies  from  the  small 
grocery  stand  to  the  large  departmental  store.    The  re- 


SELLING  239 

toiler  is  the  most  important  link  in  the  general  distribu- 
tion of  goods  from  the  manufacturer  to  the  actual  con- 
sumer. To-day  nearly  90  per  cent  of  all  groceries,  clothing 
and  drugs  are  distributed  through  retail  stores.  Many 
jobbers  conduct  a  retail  as  well  as  a  wholesale  business, 
but  sell  to  retailers  at  a  cheaper  rate  than  to  actual 
consumers.  Retailers  do  not  care  for  the  competition 
of  jobbers  in  their  field,  and  whenever  possible,  refuse 
to  patronize  those  who  retail  their  goods.  This  keeps 
many  jobbers  strictly  in  their  own  field. 

The  retailer  is  reached  by  the  jobber  or  the  manufac- 
turer in  three  different  ways,  —  traveling  salesmen, 
advertising,  letter  or  circular.  Each  has  a  distinctive 
field  in  selling  and  requires  careful  considera-  Methods  of 
tion.  In  deciding  upon  the  method,  careful  H^  ^^ 
study  should  be  made  of  the  product  to  be  merchants, 
sold,  and  that  which  is  best  adapted  should  be  used. 
Some  goods  may  be  easily  sold  by  letter,  others  by  ad- 
vertising in  trade  journals,  while  others  demand  pres- 
entation to  the  prospective  buyer  by  competent  sales- 
men. The  most  common  method  is  that  of  salesmen, 
yet  buyers  are  often  attracted  by  letter  or  advertising. 
Frequently  a  prospective  buyer  is  introduced  to  the  goods 
by  letter  or  circular  in  order  to  prepare  him  for  the  travel- 
ing salesman.  Many  find  the  use  of  all  three  necessary, 
and  make  special  use  of  the  letter  to  introduce  the  goods 
before  the  visit  of  the  salesman. 

During  the  past  few  years,  many  manufacturers  have 
eliminated  the  services  of  the  middleman  and  sell  their 
product  directly  to  the  actual  consumers.  Salesmen  or 
agents,  branch  stores,  and  the  post  office  are  the  chief 


240  ECONOMICS  OF  BUSINESS 

means  used  in  direct  distribution  of  goods.  Many  goods, 
as  pianos,  agricultural  implements,  automobiles  and 
Methods  of  Carriages,  are  especially  adapted  for  distribu- 
direcf  to  ^^^^  through  agents.  There  is  a  growing  tend- 
consumers.  ency  for  manufacturers  of  certain  goods,  as 
boots,  shoes,  hats,  etc.,  to  distribute  them  through  their 
own  retail  stores.  The  great  increase  in  the  factory-to- 
consumer  business  has  largely  resulted  from  develop- 
ment in  advertising.  Advertising  has  been  an  im- 
portant factor  in  making  possible  our  industrial  and 
economic  development. 

The  mail-order  business  is  of  recent  origin  and  every 
year  is  assuming  greater  proportions.  Many  large  es- 
tablishments do  only  a  mail-order  business,  while  many 
Maa-order  retail  stores  have  made  it  a  special  depart- 
business.  ment.  It  depends  for  its  success  upon 
advertising,  which  is  the  very  life  of  the  business.  It  is 
difficult  and  expensive  to  obtain  a  clientele.  Extreme 
care  and  sound  judgment  should  be  exercised  in  choosing 
mediums  for  advertising  so  as  to  reach  the  class  of  people 
who  will  buy  the  goods  offered  for  sale. 

The  mail-order  business  has  many  advantages  over 
ordinary  retailing.  The  field  of  selling  in  the  latter  case 
Advantages  is  limited  to  a  locality  more  or  less  restricted, 
ordtr  bSS."  ^^^^  ^  ^^^  former,  the  limit  is  the  American 
ness.  continent.    Sears,  Roebuck  and  Company  have 

customers  in  every  state  in  the  Union,  as  well  as  in  nearly 
every  province  of  Canada.  The  mail-order  department 
of  Best  and  Company,  New  York,  operates  in  all  parts  of 
the  United  States,  as  well  as  Canada.  Local  conditions 
frequently  react  upon  business,  but  the  mail-order  busi- 


SELLING  241 

ness  escapes  such  influences.  The  expenses  of  conducting 
such  a  business,  when  once  established,  are  far  less  than 
the  retail  business.  A  large  stock  is  not  needed,  and  ex- 
pensive floor  space  is  saved.  A  loft  will  serve  as  head- 
quarters, as  well  as  an  expensive  store.  The  expenses 
of  selling  are  largely  confined  to  advertising,  whereas  in 
a  retail  business  a  selling  as  well  as  an  advertising  force 
must  be  maintained.  The  business  is  strictly  cash  and 
the  risks  of  credit  are  ehminated.  The  expenses  saved 
in  selling  are  sufficient  to  allow  the  sale  of  goods  at  lower 
prices.  Competition  can  be  keenly  carried  on  with  local 
merchants,  and  many  believe  the  time  is  not  far  distant 
when  local  competition  will  be  greatly  increased  by  mail- 
order houses  with  headquarters  in  distant  cities. 

In  buying  through  the  mails,  time  is  necessary  for 
delivery.  This  varies  with  the  distance,  and  the 
promptness  of  the  selling  establishment  in  Disadvan- 
filling  orders  and  in  shipping  goods.  In  many  mau-order* 
cases,  purchasers  take  decided  risks  in  buying  business, 
from  catalogues.  These  risks  are  almost  eliminated 
with  staples  or  known  brands,  but  with  goods  where 
style  is  a  requisite,  the  chances  of  dissatisfaction  are 
great.  An  article  may  look  very  attractive  in  a  picture, 
but  when  it  is  seen,  it  may  be  unbecoming  and  unsatis- 
factory. Where  dissatisfaction  occurs,  it  is  quite  a 
different  matter  from  taking  the  article  down  to  a  store 
or  to  a  neighboring  town  to  have  it  changed  or  altered. 
It  must  be  sent  back,  and  frequently  considerable  trouble 
arises  in  making  the  exchange.  The  mail-order  business 
is  not  very  satisfactory  for  articles  depending  upon  style 
for  their  sale. 


242  ECONOMICS  OF  BUSINESS 

Retail  stores,  although  keenly  feeling  in  many  ways, 
the  competition  of  the  mail-order  business,  will  continue 
for  years  to  be  the  chief  factor  in  the  distribution  of  goods 
to  the  actual  consumer.  Several  advantages  arise  in 
Advantages  buying  from  retail  stores.  There  is  no  wait- 
and  disad-     i^g,  as  goods  are  delivered  within  a  few  hours 

vantages  of  "  ,       ,., 

retail  after  purchase.     Many  people    like    to    see 

business.  goods  before  they  are  bought.  If  dissatisfac- 
tion or  error  arise,  correction  can  easily  be  made.  The 
retailer  has  a  good  opportunity  to  study  the  tastes 
of  the  consumer,  and  can  keep  in  stock  goods  that  readily 
sell.  He  can,  if  he  is  a  careful  observer  and  possesses 
good  judgment,  adapt  his  stock  to  local  needs.  The 
selling  field  of  the  retailer  is  more  or  less  restricted.  In 
small  places,  it  does  not  extend  beyond  the  village  or 
town,  and  a  few  miles  of  surrounding  country.  The  area 
is  nevertheless  greatly  extended  as  the  city  of  location 
increases  in  size.  In  small  cities  and  towns,  the  question 
of  credit  demands  careful  consideration.    It  is 

Credit. 

difficult  to  run  a  strictly  cash  business.  Some 
competitor,  in  order  to  attract  trade,  gives  credit,  and  very 
often  forces  others  to  do  the  same.  Every  inducement  is 
used  to  attract  trade,  and  in  the  eyes  of  many  farmers 
and  artisans,  credit  is  very  great.  Credit  is  a  serious 
handicap  to  many  retail  enterprises.  In  large  cities,  a 
retail  store  can  be  run  on  a  cash  basis,  yet  frequently 
it  is  necessary  to  give  the  extra  inducement  of  credit. 
To  refuse  credit  may  often  lose  a  customer,  and  to  give 
may  mean  a  loss  of  money.  The  retailer  should  use 
his  discretion,  and  not  handicap  his  business  by  being  too 
liberal  in  granting  credit. 


SELLING  243 

Two  primary  reasons,  value  and  service,  may  be  given, 
why  buyers  are  attracted  to  particular  stores  for  their 
goods.     A  third,  style,  is  added  in  the  case  of  Reasons 
clothing,  millinery  and  other  goods,  in  which  ^^y  *^"s- 

°'  ''  1.1  tomers  are 

it  is  a  requisite.  The  average  buyer  wishes  to  attracted 
get  the  best  value  for  his  money,  and  the  most  *°  stores, 
important  consideration  underlying  value  is  quaUty. 
When  a  firm  has  gained  the  confidence  of  the  consuming 
public,  and  estabHshed  its  business  name  as  standing 
only  for  goods  of  the  highest  quality,  it  has  acquired  a 
valuable  asset  in  attracting  trade.  It  takes  years, 
thousands  of  dollars  in  advertising,  and  a  most  rigid 
inspection  system  to  acquire  this  reputation,  but  when 
obtained,  it  repays  a  hundred  fold  every  cent  spent. 

The  best  value  for  the  price  is  what  attracts.  The 
seller  who  can  convince  the  pubHc  that  he  is  giving  the 
best  value  for  the  price  has  Httle  difficulty  Honggty 
in  selling  his  goods.  When  the  confidence  of  m  price  and 
the  people  is  once  secured,  every  precaution 
should  be  taken  to  keep  it,  and  this  can  be  done  by  pre- 
venting inferior  goods  from  getting  on  the  market. 
Many  sellers  believe  that  if  confidence  is  once  secured, 
then  the  people  can  be  duped  by  poorer  grades.  It 
will  not  take  the  pubHc  long  to  know  that  they  are 
being  deceived,  and  once  that  is  realized,  the  old  es- 
tabHshed standard  may  not  be  regained.  Give  people 
the  best  value  for  their  money,  and  the  seller  need  not 
fear  the  inroads  of  competition. 

A  seller  should  give  most  careful  attention  to  the 
services  rendered  by  his  establishment.  Good  service 
makes  many  demands,  the  most  important  of  which  are 


244  ECONOMICS  OF  BUSINESS 

as  follows:  prompt  attention  to  orders;  prompt  and 
courteous  attention  to  customers;  prompt  delivery  of 
Service  and  goods ;  promising  nothing  which  cannot  be 
its  demands,  (jone ;  rigidly  carrying  out  all  promises; 
delivering  goods  only  in  the  grades  ordered;  taking 
every  precaution  that  mistakes  are  not  made,  and  if 
made,  prompt  attention  to  their  correction;  prompt 
attention  to  all  dissatisfaction  and  settlement  of  the 
difficulty  without  arousing  the  enmity  of  the  customer ; 
and,  lastly,  attention,  especially  in  a  retail  business,  to 
the  comfort  of  customers.  Attention  to  all  these  de- 
mands assists  in  building  up  trade  and  estabhshing  a 
firm's  name  with  the  public.  The  successful  business 
man  finds  it  profitable  to  pay  particular  attention  to 
service,  and  to  see  that  all  its  demands  are  strictly 
carried  out. 

Style  is  a  necessary  requisite  in  many  goods.  People 
wish  to  have  their  clothes,  hats,  and  shoes  of  the  latest 
style  as  a  Style.  Progressive  merchants  should  carefully 
factor  in  study  their  goods  and  carry  only  those  of  the 
selling.  latest  style.  The  connection  of  a  merchant's 
name  with  that  of  always  carrying  the  latest  styles,  is  a 
valuable  asset  not  only  in  getting  trade,  but  in  holding  it. 
A  purchaser  buys  where  he  can  get  the  best  value,  best 
service  and  latest  style,  at  the  lowest  price. 

The  customer  is  the  objective  point  in  all  selling. 
Customers  must  be  obtained  before  goods  are  sold.  An 
Obtaining  important  problem  is  to  get  a  customer  to 
and  holding  make  his  first  purchase,  and  a  second,  more 
cus  omers.  jjjiportant  perhaps  than  the  first,  is  to  retain 
his  trade  in  the  future.    The  first  sale  oftentimes  comes 


SELLING  245 

through  chance.  A  person  wishes  goods  and  goes  to  the 
first  store  to  get  them.  A  salesman  frequently  gets  his 
first  order  in  the  same  way.  A  storekeeper  needs  goods, 
a  salesman  offers  them,  and  if  his  price  is  satisfactory,  the 
sale  is  easily  made.  The  first  sale  is  ordinarily  a  more 
difficult  task.  The  first  step  is  to  attract  people  to  the 
goods.  This  may  be  done  by  advertising,  displays  or 
salesmen.  The  second,  and  more  difficult,  is  to  arouse 
interest  and  to  create  a  desire  to  possess,  culminat- 
ing in  a  sale.  A  serious  problem  is  to  get  people,  after 
making  the  first  purchase,  to  come  back  for  future  pur- 
chases. If  a  merchant  solves  this,  he  adds  a  valuable 
asset  to  his  business.  It  is  still  better  to  so  please  a 
customer  that  he  will  not  only  return,  but  will  induce  his 
friends  to  come  to  trade.  Success  in  selling  consists  in 
getting  new  customers  and  in  making  them  so  well 
pleased,  that  they  will  not  only  become  permanent,  but 
act  as  solicitors  for  new  trade. 

Satisfaction  is  a  great  power  in  holding  customers. 
It  rests  on  the  relation  of  merchant  or  manufacturer 
with  those  who  buy.  Satisfaction  depends  satisfaction, 
upon  services  rendered,  goods  sold,  value  re-  the  chief 

.  ^  o  7  power  in 

ceived,  and  the  feeling  that  goods  are  not  mis-  holding 
represented,  that  all  errors  will  be  corrected  customers, 
and  that  goods,  if  unsatisfactory,  will  be  exchanged,  or 
money  refunded.  Satisfied  customers  are  a  valuable 
asset  to  a  business.  Good  will,  which  is  often  valued 
at  large  sums,  consists  of  satisfied  customers.  An  im- 
portant factor  in  business  building,  and  one  greater  than 
present  profits,  is  the  confidence  and  good  will  of  cus- 
tomers, as  they  assure  the  profits  and  success  of  the  future. 


246  ECONOMICS  OF  BUSINESS 

What  is  the  view  point  of  customers  ?  This  is  a  ques- 
tion which  manufacturers  and  traders  frequently  neg- 
im  rtance  ^^^^  ^^  Consider.  It  is  a  serious  one  in  sup- 
of  view-  plying  foreign  as  well  as  domestic  markets, 
customers  1"^^  Germans  were  the  first  to  adopt  scien- 
in  foreign      ^ific  methods  in  studying  the  wants  of   the 

markets.  ,  . 

people  with  whom  they  wished  to  trade,  or 
with  whom  they  were  trading.  The  kind,  the  brand  and 
the  style  of  goods  which  the  people  demanded  were  manu- 
factured and  sent  to  their  markets.  The  result  was  that 
the  Germans  were  soon  leading  other  countries  in  com- 
petition in  foreign  markets.  The  Americans  were  the 
last  to  learn  the  necessity  of  studying  the  wants  of 
customers,  and  much  has  been  done  in  this  respect 
during  the  past  few  years.  They  have  learned  that 
people  know  what  kind  of  goods  they  want,  and  that 
with  competition  so  keen,  the  grade  of  goods  needed 
must  be  supphed  to  get  a  market.  Many  traders  in 
foreign  markets  find  it  profitable  to  send  representatives 
to  carefully  study  the  wants  of  the  people,  and  to  find 
out  the  kind  of  goods  they  need.  At  the  present  time, 
the  consuls  in  differents  parts  of  the  world  assist  Amer- 
ican manufacturers  by  making  reports  from  time  to 
time  as  to  what  are  the  needs  of  the  people  in  their  terri- 
tories, and  the  kind  of  goods  they  will  buy.  The  man- 
ufacturer for  the  domestic  trade,  as  well  as  for  the 
foreign,  cannot  neglect  paying  careful  attention  to  the 
wants  of  his  prospective  buyers. 

A  study  of  customers  in  a  retail  business  is  a  very 
important  essential.  This  is  done  in  small  establish- 
ments by  the  manager,  but  in  large  establishments  clerks 


SELLING  247 

assist  in  the  work.     The  wishes,  wants,  likes  and  dis- 
likes are  obtained  in  a  way  that  does  not  offend  cus- 
tomers.     The  manager   finds  out  what  his  study  of 
customers  want.    This  is  important,  because  customers 

essential  in 

it  enables  him  to  keep  m  stock  goods  which  retau 
readily  sell.  Every  retail  merchant  should  ^^^"^®^^* 
make  it  his  aim  to  know  the  wants  of  his  customers,  and 
to  meet  their  demands.  The  four  elements  in  successful 
retaihng  may  be  summarized  as :  buying  at  right  prices ; 
selling  at  a  profit;  successfully  forecasting  demand  so 
that  when  out  of  season  few  goods  will  be  left  for 
bargain  coimters ;  and  satisfying  customers. 

A  knowledge  of  markets,  which,  as  we  have  seen,  is 
very  essential  in  buying,  is  equally  so  in  the  selling  of 
many  products.     Conditions  that  in  any  way  Knowledge 
affect  the  prices  of  goods  should  be  studied.  condSdons 
Demand   increasing   and   supply   normal,    a  essential, 
seller  may  increase  his  profits  by  an  early  increase  in 
price.    Many  sellers,  not  aware  of  an  increased  demand, 
do  not  raise  prices  as  early  as  they  could,  and  thus  lose 
profits.     Supply  may  increase  and  demand  be  Forecasting 
normal,  or  the  supply  remain  steady  and  the  ^^^^^ 
demand    decrease.    The    shrewd    seller,    by  supply  and 
studying    market    conditions,    foresees    this  ^^°^^^' 
changed  relation  between  supply  and  demand,  and  if  he 
is  forced  to  dispose  of  a  supply  of  goods,  a  slight  decrease 
in  price  before  others  in  the  market,  enables  him  to  dis- 
pose of  his  goods  to  better  advantage  than  he  could  by 
waiting  for  some  other  trader  to  lower  the  price.     Sellers 
find  it  to  their  advantage  to  thoroughly  know  market 
conditions  so  as  to  forecast  future  changes  in  supply 
and  demand  for  their  goods. 


248  ECONOMICS  OF  BUSINESS 

Selling  was,  until  quite  recently,  looked  upon  as  an 
art,  and  it  was  thought  that  it  could  not  be  reduced  to 
Sales  scientific  principles,  but  the  increased  interest 

Ss^iSi-  which  has,  during  the  past  few  years,  been 
ties.  given  to  conducting  business  has  brought  sell- 

ing imder  consideration,  and  it  is  gradually  being  re- 
duced to  principles  and  to  a  science.  In  the  success  of 
every  manufacturing  and  mercantile  enterprise,  great 
responsibihty  rests  upon  the  seUing  department.  It 
should  be  in  charge  of  a  competent  sales  manager, 
and  upon  his  ability  frequently  depends  the  financial 
success  of  the  business.  The  successful  sales  manager 
is  usually  a  graduate  from  the  ranks  of  salesmen.  Ex- 
perience and  success  as  a  salesman  are  prerequisites. 
He  should  be  thoroughly  acquainted  with  the  policies 
and  methods  of  his  firm.  His  knowledge  of  goods, 
competitors  in  the  field  and  market  conditions  affecting 
supply  and  demand,  should  be  accurate  and  thorough. 

The  sales  manger  should  be  a  good  student  of  human 
nature,  able  to  read  character  quickly  and  accurately, 
.  and  a  good  judge  of  men.    Much  of  the  sue- 

in  selecting  cess  of  a  salcs  force  depends  upon  the  ability 
°*®^  to  select  men.     In  selHng,  more  depends  per- 

haps upon  the  men  than  upon  the  goods.  The  selection 
of  new  men  should  be  careful,  deliberate,  and  not  hasty. 
Care  should  be  exercised  in  ascertaining  many  facts 
regarding  applicants,  as  for  example,  infirmities  that 
might  affect  health,  health  for  the  past  few  years,  habits, 
educational  training,  care  about  person  and  dress,  suc- 
cess or  failure  in  previous  work,  ease  in  meeting  people, 
control  of  self,  and  honesty,  integrity  and  sincerity  in  work. 


SELLING  249 

Proper  selection  should  be  followed  by  efiicient  methods 
in  training.  No  salesman  is  ready  to  represent  a  firm 
and  sell  immediately  upon  selection.  Even  ^^^g^^^  ^f 
if  experienced  and  successful  as  a  salesman,  salesmen  a 
some  time  should  be  spent  in  getting  acquainted  "®*^®^®*  ^' 
with  the  business  methods  of  the  firm,  the  character  of  the 
goods  to  be  sold  and  a  knowledge  of  their  manufacture. 
For  years,  business  men  beHeved  that  experience  was  the 
sole  means  of  developing  a  salesman.  As  in  many 
vocations,  success  largely  depends  upon  natural  endow- 
ments, but  it  is  also  due  to  the  development  of  these 
gifts.  Careful  training  preceding  selling  is  an  absolute 
necessity.  The  untrained  and  inexperienced  man  must 
necessarily  make  mistakes,  and  every  mistake  is  more 
or  less  costly  to  a  business.  Training  better  prepares 
salesmen  for  their  work,  and  a  large  number  of  the  mis- 
takes of  the  inexperienced  are  avoided.  Training  is  a 
business  proposition  for  every  manufacturer  or  merchant, 
and  as  such  should  be  given  careful  consideration.  A 
growing  practice  is  to  have  a  rigid  course  of  training, 
and  to  insist  that  all  quaUfy  by  making  a  certain  stand- 
ard before  they  are  sent  on  the  road,  or  behind  the 
counter. 

Every  salesman  should  be  carefully  and  thoroughly 
trained  in  the  fundamental  principles  of  salesmanship. 
How    to  express  himself   in  correct  English,  punda- 
dress  properly,  approach  a  customer,  attract  mental 
attention,  arouse  interest,  and  bring   a  cus-  ofsaies- 
t(.  -ner  to  action  in  a  sale,  are  some  of  the  fun-  "^"^^  ^* 
damentals  necessary  in  salesmanship.      The  methods 
used  in  training  depend  largely  upon  the  goods  to  be 


250  ECONOMICS  OF  BUSINESS 

sold,  and  upon  the  past  experience  of  the  men.  Al- 
though the  general  principles  are  the  same,  yet  their 
application  varies  in  every  instance,  with  the  kind  of 
product  sold.  The  method  used  in  selling  harvesting 
machinery  is  different  from  that  used  in  selling  dress- 
goods.  If  the  article  to  be  sold  is  simple,  the  training 
is  different  from  that  used,  if  it  is  a  compUcated  piece  of 
machinery.  In  every  instance,  the  training  should  be 
along  practical  business  lines.  A  salesman,  if  trained, 
gives  better  service,  and  increases  his  value  to  himself, 
as  well  as  to  the  firm.  Training  is  not  complete  unless 
it  includes  a  thorough  knowledge  of  the  character  of  the 
goods,  the  raw  materials  which  enter  into  their  manu- 
facture and  the  processes  of  their  production.  A  new 
salesman  with  successful  experience  should  be  carefully 
examined  in  the  principles,  and  if  satisfactory,  the 
elementary  training  may  be  omitted.  Competition  is 
so  keen  at  present  that  thorough  training  is  absolutely 
necessary. 

A  salesman  should  be  able  to  talk  intelligently.  Bad 
English  reflects  not  only  upon  the  salesman,  but  upon 
-  the  house  which  he  represents.    A  salesman 

EngUsha  should  be  able  to  express  his  ideas  clearly, 
necessity.  ga,sily  and  forcefully  in  good  and  correct  Eng- 
Ush.  If  a  prospective  salesman  has  not  had  a  thorough 
training  in  English,  he  should  receive  one.  This  should 
be  insisted  upon  as  a  necessary  prerequisite. 

The  question  of  dress  is  an  important  one,  and  it  is  a 
Dress  an  necessity  to  be  well  dressed.  The  salesman  is 
essential.  ^]^g  representative  of  the  house,  and  it  is 
through  him  that  many  form  their  opinion  concerning  the 


SELLING  251 . 

firm.  People  like  to  do  business  with  a  prosperous  firm 
and  the  sign  of  prosperity  that  many  see  is  a  well-dressed 
representative.  Dress  can  be  overdone.  All  manner- 
isms and  extremely  noticeable  features  in  dress  should 
be  avoided,  as  customers'  attention  is  attracted  to  them 
and  not  to  the  goods  offered  for  sale.  Good  taste  in 
dress  must  in  many  cases  be  cultivated.  Many  sales 
managers  take  special  pains  to  instruct  their  men  to 
dress  properly.  A  strong,  robust,  good-looking,  well- 
dressed  salesman  always  attracts  attention.  Good 
dress  often  smoothes  the  way  for  conversation,  which 
frequently  leads  to  arousing  interest  in  goods,  when  it 
would  otherwise  have  been  difficult  to  approach  a  pro- 
spective customer.  Not  only  to  be  well  dressed,  but  to 
be  clean,  neat  and  tidy  in  person  are  requisites  ^o  be 
which  must   be   scrupulously   followed   out.  ^®^ 

dressed 

Physique  and  health  as  well  as  care  of  self  brings 
and  dress  are  essentials  of  success,  and  spe-  ^"s*^®^^. 
cial  attention  should  be  paid  to  the  acquiring  and  de- 
velopment of  these  quaHties. 

The  manner  of  approaching  a  customer  is  impor- 
tant and  frequently  a  sale  depends  upon  it.  Few  cus- 
tomers like  to  do  business  with  strangers.  A  ^^^^^  f 
salesman  should  meet  his  customer  as  an  equal,  approaching 
and  make  him  feel  as  though  he  were  talk-  *  ^^^  °™®'* 
ing  with  an  acquaintance.  Many  customers  Hke  to  be 
called  by  name  and  many  have  particular  likes  and  dislikes. 
Learn  the  name  and  something  about  a  customer  before 
calling.  This  assists  in  knowing  how  to  approach  him. 
Some  are  won  by  a  hearty  handshake  while  others  con- 
sider it  too  familiar.    A  salesman  should  closely  follow 


252  ECONOMICS  OF  BUSINESS 

the  expression  of  his  customer's  face  and  be  able  to  tell 
the  proper  way  to  greet  him.  The  first  greeting  often 
means  a  great  deal.  Every  precaution  should  be  taken 
to  greet  a  customer  in  such  a  way  that  he  will  not  be 
offended,  and  this  demands  that  a  salesman  be  a  close 
student  of  human  nature. 

A  salesman  should  first  get  the  attention  of  a  customer ; 
secondly,  arouse  his  interest;  thirdly,  create  a  desire 
Factors  to  possess,  and  fourthly,  convince  him  to 
ciose^a^  ***  possess  or  make  the  sale.  Interest  if  properly 
sale.  retained  often   develops  into  desire  without 

further  effort  of  the  salesman.  The  desire  for  goods 
must  be  brought  to  a  chmax  in  a  sale.  Many  salesmen 
can  lead  customers  to  the  point  of  closing  but  are  unable 
to  make  the  sale.  The  power  to  close  is  a  valuable 
asset  in  any  salesman.  In  selling,  there  is  a  time  when 
the  buyer  is  ready  to  close,  but  few  salesmen  are  able 
to  recognize  this.  They  lead  the  buyer  to  the  point, 
but  they  do  not  know  the  proper  moment  for  decisive 
action,  and  the  sale  is  lost.  Frequently  it  is  necessary 
to  send  a  special  salesman  to  assist  in  closing.  The 
factors  necessary  in  closing  are,  knowledge  of  human 
nature,  attention  to  everything  a  buyer  says,  judicious 
offering  of  suggestions,  talking  only  when  necessary, 
meeting  all  criticism,  knowing  when  desire  is  created 
and  when  the  buyer  is  ready  to  act,  and  lastly,  the  ability 
to  convert  the  resolution  into  a  sale.  Training  in  the 
requisites  for  making  a  sale  is  the  most  diffi- 

Training.  7  i      •  .    .  r  i  i  •  a 

cult  task  in  traimng  for  salesmanship.  A 
successful  method  is  to  place  the  prospective  salesman 
in  charge  of  a  thoroughly  competent  man.     Mock  sales 


SELLING  253 

should  be  made  under  the  supervision  of  the  instructor ; 
the  student  taking  first,  the  part  of  the  customer,  and 
then  that  of  the  salesman.  This  part  of  the  training 
should  be  as  practical  as  possible,  and  continued  until 
a  certain  standard  has  been  reached. 

An  essential  part  of  training  is  the  mastery  of  the 
making,  and  uses  of  the  goods  to  be  sold.  A  sales- 
man before  being  allowed  to  represent  a  firm  in  sell- 
ing goods  should  be  acquainted  with  every  de-  Thorough 
tail  concerning  them,  not  only  their  making,  ^goods^* 
but  the  materials  of  which  they  are  made.  If  necessary, 
possible,  he  should  be  acquainted  with  the  materials 
used  in  the  making  of  competitors'  goods.  This  is 
essential  and  important  for  purposes  of  comparison, 
and  proving  the  quality  of  his  own  goods  over  those  of 
competitors.  It  is  advisable  for  a  salesman  to  spend 
some  time  in  a  factory,  where  goods  are  made,  so  as  to 
thoroughly  master  every  detail  of  their  making.  Know- 
ing thoroughly  the  materials  and  quahties  out  of  which 
goods  are  made,  the  processes  of  manufacture,  the 
special  care  taken  to  insure  the  quaHty  of  the  finished 
product,  causes  of  cost,  and  competitors'  goods,  are 
essentials  for  every  salesman. 

Many  sales  managers  think  it  is  necessary  to  have 
standard  selHng  talks.     They  prepare  and  put  in  set 
form,  the  introduction  and  all  arguments  to  be  used  in 
selling  goods.     Sometimes,  answers  to  possi-   standard 
ble  objections  and  criticisms  are  prepared,   seiung 
These  talks  are  memorized  by  the  salesmen. 
The  serious  objection  is  that  a  set  talk  will  not  do  for  all 
customers.    No  two  customers  are  the  same,  and  what 


254  ECONOMICS  OF  BUSINESS 

will  persuade  in  one  case,  will  not  in  another.  A  more 
satisfactory  method  is  to  carefully  train  salesmen,  and 
leave  to  them  the  language  and  the  arguments  to  be 
used,  in  approaching  and  presenting  goods  to  a  cus- 
tomer. 

Suggestion  is  a  great  force  when  leading  from  desire 
to  sale.  A  salesman  should  be  able  to  assist  a  customer 
Importance  ^^  suitable  suggestions.  These  should  be 
of  sugges-  made  at  the  right  time,  and  in  the  proper  way, 
so  as  to  lead  a  customer  to  believe  that  the  sug- 
gestions are  his  own.  A  valuable  quaUty  is  that  of  being 
able  to  decide  for  a  customer,  and  at  the  same  time  make 
him  feel  as  you  do  without  his  knowing  it.  Many 
sales  are  actually  made  by  salesmen,  yet  the  customers 
firmly  beHeve  that  they  alone  made  the  decision  to  pur- 
chase, and  would  be  offended,  if  told  that  they  simply 
followed  the  suggestions  of  the  salesman. 

A  salesman  should  not  force  goods  upon  a  customer,  or 
appear  too  anxious  to  make  a  sale.  He  should  pay  par- 
ticular attention  to  the  quality,  style  and  service  of  his 
goods,  and  leave  the  price  in  the  background.  It  is 
always  unwise  to  argue  with  a  customer.  Openly  dis- 
puting what  a  customer  has  to  say  often  loses  a  sale.  A 
salesman  should  know  what  arguments  to  advance,  and  be 
quick  to  perceive  when  he  has  said  enough.  He  should 
be  able  accurately  to  read  at  a  glance  what  pleases  or 
displeases  his  customer.  Wherever  possible,  the  cus- 
tomer should  be  allowed  to  do  the  talking.  The  sales- 
man should  listen  attentively  and  assist  in  making  the 
decision  by  occasional  suggestions. 

A  salesman  should  have  absolute  command  of  himself, 


SELLING  25s 

and  it  matters  not  what  circumstances  arise,  or  what  a 
customer  says,  he  should  not  lose  his  temper,   ^^^^  ^ 
but  be  calm,  cool  and  dehberate.     Frequently  tact  and 
when  a  customer  finds  that  his  outbursts  of  tem-  ^^^^  ^^^^* 

per  are  calmly  met,  he  is  gradually  won  over  to^s  in 

,  success, 

and  often  makes  a  purchase.  Tact  is  a  neces- 
sity for  the  successful  salesman.  It  is  that,  which  enables 
a  man  to  adapt  himself  to  circumstances,  and  allows  him 
to  see  when  he  is  using  the  wrong  method  and  to  change 
to  meet  a  customer.  A  salesman  should  be  temperate, 
never  be  seen  in  bad  company,  in  disreputable  places, 
or  under  the  influence  of  liquor.  These  things  lower 
the  dignity  of  a  salesman  and  reflect  upon  the  house 
which  he  represents.  He  should  have  confidence  in  the 
goods  which  he  is  selHng.  Knowledge  of  his  goods,  and 
faith  in  their  qualities  are  essential  for  enthusiasm  and 
work.  Enthusiasm  is  valuable  as  frequently  it  is  the 
force  which  attracts,  and  holds  the  attention  of  the  cus- 
tomer. The  one  great  essential  is  confidence  in  himself. 
With  this  lacking,  success  is  doubtful.  This  should  be 
associated  with  confidence  in  employer  and  the  goods 
sold. 

In  conversation  with  a  customer,  a  salesman  should 
never  use  the  name  of  a  competitor  unless  it  cannot  be 
avoided.     Under  no  circumstances  should  he  speak  weu 
speak  disparagingly  of  a  competitor's  goods  ^^^il^^^d 
nor   abuse  or  slander  a  competitor    or   his  his  goods, 
representative.     If  a  customer  brings  into  conversation 
a  competitor's  name,  a  salesman  should  frankly  admit 
whatever  merit  his  goods  possess  and  be  at  all  times 
ready  to  draw  the  attention  of  the  customer  to  some 


256  ECONOMICS  OF  BUSINESS 

greater  merit  in  his  own.  Few  things  detract  so  much 
from  the  dignity  of  a  salesman,  or  the  house  which  he 
represents,  as  to  hear  him  abuse  or  slander  a  competi- 
tor or  his  representative,  and  stamp  as  not  worthy 
of  consideration,  goods  in  competition  with  his  own. 

Some  salesmen  find  it  profitable  to  collect  and  keep  in- 
formation about  customers.  Every  customer  has  usually 
Importance  Strong  points  or  special  likings.  These  can 
tionlbout "  ^^  ascertained  from  time  to  time  by  salesmen, 
customers,  collected  and  kept  on  record  for  use,  when 
customers  are  approached  for  sale.  A  salesman  consults 
the  records  before  he  goes  to  a  customer.  John  Brown 
is  a  golf  enthusiast.  A  salesman  looks  up  some  points 
about  the  game,  and  often  gains  confidence  which  it 
would  otherwise  be  difficult  to  acquire.  Information 
concerning  customers  is  always  of  great  service  to  sales- 
men. It  frequently  allows  the  making  of  an  easy 
approach  and  forming  an  acquaintance,  which  materially 
assists  in  making  sales. 

In  a  retail  store,  a  salesman  should  be  carefully  studied 
and  placed  in  a  position  suited  to  his  inchnation.  He 
Choice  of  should  believe  in  what  he  is  selling.  A  sales- 
place  im-  man  was  given  a  particular  style  of  goods 
to  sell  and  failed.  On  investigation,  it  was 
learned  that  he  did  not  believe  in  the  style,  and  was  not  in 
sympathy  with  it.  He  was  changed  to  selling  a  style  which 
he  Uked  and  was  at  once  successful.  Considerable  harm 
is  frequently  done  by  putting  men  in  wrong  places. 

Salesmen  may  be  divided  into  the  following  classes, 
—  traveling,  city  and  store.  Traveling  salesmen  call  on 
customers  out  of  the  town  or  city  where  the  enterprise 


SELLING  257 

is   situated.     City    salesmen    sell    in    the    city,    while 
store  salesmen  wait  upon  customers  over  the  classes  of 
counter.    They  differ  only  with  respect  to  the  salesmen, 
class  of  customers  which  they  reach.     The  general  prin- 
ciples of  salesmanship  are  essential  in  all  classes,  but  the 
application  varies  with  the  goods  sold. 

A  sales  manager  should  have  a  thorough  knowledge  of 
trade  conditions.  These  maybe  divided  into  general  and 
local.  The  former  is  treated  imder  Market,  knowledge 
The  latter  demands  careful  study  of  buyers  of  trade 
and  competitors  in  the  field.  The  most  effec- 
tive source  for  obtaining  such  information  is  through 
salesmen.  A  salesman  should  always  be  on  the  alert 
for  information  that  might  be  of  service  to  his  em- 
ployer. Competitors'  goods  in  the  field  should  be  care- 
fully studied.  What  is  their  quality?  In  what  form 
are  they  sold  ?  Are  they  more  attractive  than  those 
you  sell  ?  What  are  the  views  of  consumers  ?  What  is 
the  character  of  the  advertising  of  the  competitor? 
What  suggestions  can  be  made  to  increase  demand? 
Are  any  changes  made  in  competitors'  prices  ?  Is  there 
likelihood  of  any  change  in  demand  ?  These  are  some  of 
the  questions  which  a  salesman  should  be  able  to  answer. 
The  information  is  of  the  greatest  importance  in  making 
changes  to  meet  customers'  wishes,  and  competitors  in 
the  field. 

A  sales  manager  should  have  some  means  of  keeping 
in  touch  with  his  salesmen.  This  is  done  by  reports. 
There  are  usually  two  kinds,  daily  and  weekly. 

rr^t        1    M  11  .  ;       Reports. 

The  daily  are  generally  sent  m  on  post  cards, 

but  at  the  end  of  the  week,  a  carefully  detailed  report  of 


2s8  ECONOMICS  OF  BUSINESS 

the  week's  work  is  sent.  Reports  keep  sales  managers 
always  in  touch  with  the  work  of  their  men.  They  are 
essential,  and  a  properly  arranged  system  adds  very 
much  to  the  efficiency  of  a  business. 


QUESTIONS 

1.  Why  is  selling  an  important  factor  in  the  success  of 
every  enterprise  ? 

2.  Mention  the  different  methods  of  selling.  What  care 
should  be  exercised  in  the  choice  of  a  method  ? 

3.  Why  is  the  jobber  a  necessity  in  our  distributing  sys- 
tem ?    What  efforts  have  been  made  to  eliminate  him  ? 

4.  Give  the  advantages  and  disadvantages  of  the  mail 
order  business.     Give  the  reasons  for  its  rapid  growth. 

5.  Why  are  value,  service  and  style  three  important 
factors  in  selling?  What  are  the  requirements  for  good 
service  ? 

6.  What  methods  may  be  used  for  making  the  first  sale  ? 
Give  the  importance  of  satisfaction  in  holding  customers. 

7.  What  is  the  importance  of  the  viewpoint  of  customers 
in  (a)  foreign  markets,  (b)  domestic  markets  (c)  in  a  retail 
business  ?    How  may  the  viewpoint  be  obtained  ? 

8.  Why  is  a  knowledge  of  market  conditions  essential  ? 
What  advantages  arise  therefrom  ? 

•  9.  What  qualities  are  necessary  for  a  successful  sales  man- 
ager? Mention  the  requisites  necessary  in  selecting  sales- 
men. 

10.  What  are  the  fundamental  principles  of  salesman- 
ship ?    How  may  they  be  acquired  ? 

11.  What  part  has  education,  dress  and  enthusiasm  in  the 
making  of  sales?  Why  should  a  salesman  have  confidence 
in  self,  his  employer  and  the  goods  which  he  sells  ? 


SELLING  259 

12.  Why  is  the  power  to  close  a  sale  so  important  in 
selling  ?    Mention  the  factors  necessary  to  close. 

13.  What  is  the  importance  of  suggestion  in  selling  ?  Why 
are  control,  tact  and  confidence  three  factors  in  success  ? 

14.  How  should  a  competitor  or  his  goods  be  treated? 
Mention  some  of  the  methods  of  obtaining  an  advantage 
over  a  competitor. 

15.  What  advantages  arise  from  a  knowledge  of  trade 
conditions?  What  local  information  is  it  necessary  to  col- 
lect and  how  is  it  obtained  ? 

REFERENCES 

B.  R.  Vardaman,  "The  Master  Salesman";  A.  L.  Mac- 
bain,  "Selling";  N.  C.  Fowler,  "Practical  Salesmanship"; 
W.  Atkinson,  "Psychology  of  Salesmanship" ;  N.  G.  Lening- 
ton,  "Seven  Principles  of  Successful  Salesmanship";  D. 
Hirshchler,  "Art  of  Retail  Selling";  C.  H.  Pierce,  "Scien- 
tific Salesmanship";  W.  A.  Corbion,  "The  Principles  of 
Salesmanship,  Deportment  and  System";  J.  S.  Knox, 
"Salesmanship  and  Business  Efficiency";  C.  U.  Carpenter, 
"Profit  Making  in  Shop  and  Factory  Management,"  Ch. 
XIII;  S.  E.  Sparling,  "Business  Organization,"  Chs.  X,  XI, 
XII;  J.  H.  Collins,  "Human  Nature  in  Selling  Goods"; 
W.  D.  Moody,  "Men  Who  Sell  Things  ";  "  Business  Admin- 
istration," edited  by  W.  D.  Moody,  Vol.  Ill ;  A.  K.  Sheldon, 
"The  Art  of  Selling";  C.  Lindgren,  "The  New  Salesman- 
ship "  ;  H.  C.  Lawrence,  "  Making  Him  Buy." 


CHAPTER  XII 

PRINCIPLES  OF  ADVERTISING 

The  increase  in  the  size  of  the  business  unit,  and 
the  production  of  goods  on  a  larger  scale  increased 
Advertising  Competition  in  every  branch  of  our  industrial 
a  necessity    system.      Increased    competition    compelled 

in  our  in-  .  .  .  ,        r 

dustriai  manufacturers  to  make  a  close  study  of  every 
expansion,  (jg^ail  of  manufacturing  from  the  raw  materials 
to  the  finished  product.  This  resulted  on  the  one  hand 
in  lowering  costs  through  elimination  of  wastes  and 
the  use  of  more  efficient  methods,  and  on  the  other,  in 
new  methods  of  increasing  demand  through  attracting 
the  attention  of  the  consuming  public.  The  former 
evolved  cost  accounting  and  various  efficiency  methods, 
reaching  a  climax  in  scientific  management,  and  the 
latter  made  advertising  a  powerful  factor  in  business, 
and  reduced  its  study  almost  to  a  science.  Fifty  years 
ago,  the  average  manufacturer  produced  few  articles 
for  the  local  market.  He  personally  knew  many  of  his 
customers,  and  public  advertising  of  his  goods  was  sel- 
dom thought  necessary.  Markets  were  later  extended, 
and  the  small  factory  gave  way  to  the  large  plant.  The 
increased  production  had  to  be  sold  and  new  demands 
created.  The  developing  of  the  industrial  system  de- 
manded new  methods  of  advertising  and  it,  in  its  turn, 
proved  a  powerful  factor  in  the  extension  of  markets. 

260 


PRINCIPLES   OF  ADVERTISING  261 

Formerly,  advertising  was  chiefly  speculative.     It  re- 
ceived little  attention  and  was  not  thought  worthy  of 
study.     The    last    twenty-five    years    have  Advertising 
completely  revolutionized  advertising,  and  re-  formerly 

,      ,  speculative 

duced  it  to  fundamental  principles,  the  mas-  but  now 
tery  of  which  requires  careful  study.  Adver-  *  ^^^cessity. 
tising  has  passed  from  the  speculative  stage  to  that  where 
it  is  an  absolute  necessity,  and,  like  anything  else,  may 
be  good  or  bad.  Bad  is  simply  a  waste  of  money,  while 
good  is  one  of  the  most  potent  factors  in  business  success. 
A  few  years  ago,  many  business  men  did  not  consider 
advertising  important,  but  it  has  increased  in  impor- 
tance until  to-day,  it  would  be  difficult  to  find  any 
business  of  ordinary  size  which  does  not  advertise. 

Advertising  is  a  powerful  creative  force  in  business. 
It  causes  new  needs,  multipKes  human  wants,  and  creates 
new  demands.  The  creating  of  a  new  demand  is  its 
primary  object,  yet  its  results  are  more  far-reaching. 
To-day,  it  is  realized  that  it  is  the  strongest  possible 
factor  for  assuring  business  stability.  The  solid,  stable 
business  is  largely  maintained  through  its  use.  Ad- 
vertising has  accordingly  a  twofold  purpose.  Twofold 
to  create  a  demand  for  goods,  and  to  main-  l^^^^^tis- 
tain  the  demand  already  created.  ing- 

Advertising  may  be  divided  into  two  classes,  gen- 
eral and  direct.  The  former  is  to  create  or  maintain 
a  general  demand  for  a  good,  while  the  latter  is  for 
the  purpose  of  selling  direct  to  the  consumer,  classes  of 
Manufacturers  constitute  the  great  body  of  advertising, 
general  advertisers,  while  merchants  and  manufacturers 
who  sell  direct  to  consumers  form  the  latter  class.     Com- 


262  ECONOMICS  OF  BUSINESS 

petition  has  frequently  forced  manufacturers  to  tell 
Genend  P^ople  the  good  qualities  of  their  goods  in 
order  to  create  a  demand  for  them.  Manu- 
facturers, through  advertising,  have  often  caused  a  de- 
mand to  arise  for  their  goods,  and  forced  retailers  to 
place  their  goods  on  their  shelves.  General  advertising 
is  national  in  scope,  and  requires  careful  study  to  obtain 
results. 

Direct  advertising  was,  imtil  the  last  decade,  chiefly 
local,  but  the  introduction  of  the  mail-order  business,  and 

^.  selling  direct  to  consumer  has  made  its  field 

Direct.  .  ° 

m  many  cases  national.  Mail-order  advertis- 
ing is  the  most  difficult  of  direct  advertising,  and  requires 
careful  study  and  skill  to  write  successfully.  Local 
National  Competition  has  forced  the  local  merchant  to 
and  local.  advertise,  and  to  him  advertising  is  a  necessity. 
Local  advertising  is  simple  as  compared  with  general  or 
mail  order. 

Advertising  has  recently  assmned  the  more  dignified 
name  of  publicity.     It  has  been  defined  as  the  art  of 

•  .  creating  a  new  want.     This  is  not  exclusive, 

me  mean-  ^  ' 

ing  of  ad-  because  it  has  an  extensive  use  in  keeping  be- 
sing.  ^^^^  people  goods,  that  they  are  either  using 
or  have  used.  Advertising  reminds  them  of  the  goods, 
and  often  prevents  the  using  of  others.  The  human 
mind  must  be  jogged  from  time  to  time,  or  it  will 
forget.  Much  advertising  is  thus  used  for  assuring  the 
continual  use  of  a  good.  It  has  far-reaching  results, 
and  many  a  manufacturer  maintains  his  trade  through 
effective  advertising.  A  function  of  advertising  is  to 
make  wants  where  there  are  none  existing,  and  to  re- 


PRINCIPLES   OF  ADVERTISING  263 

awaken  desires  which  lie  dormant.  People  wish  to  be 
told  what  will  give  them  pleasure,  provide  more  com- 
fort, and  bring  health,  wealth  and  happiness.  Adver- 
tising is  well  defined  as  the  art  of  acquainting  people 
with  the  name,  nature  and  uses  of  a  salable  com- 
modity. 

No  hard  and  fast  rules  can  be  formed  to  be  rigidly  fol- 
lowed in  writing  advertisements,  or  in  methods  of  adver- 
tising. Form  and  methods  vary  with  me-  jj^^gid 
diums,  goods  to  be  advertised,  and  the  public  rules  for 
to  be  reached.  An  advertisement  suitable  *  ^^  ^^^^* 
for  a  local  paper  would  frequently  be  of  little  value  in  a 
magazine.  Nevertheless,  underlying  all  advertising,  there 
are  certain  fundamental  principles,  which  should  be 
known,  given  due  consideration  and  carefullv  heeded. 

The  first  thought  of  an  advertiser  is  to  present  his 
advertisement  in   a   way  to   attract   attention.      The 
problem  of  attracting  the  eye  is  important,  jhe  chief 
and  one  which  requires  careful  study.     Mere  aim  of 

-        advertising. 

attraction  is  not  enough.     No  value  results 
from  an  advertisement  which  possesses  only  the  power  to 
make  people  look.     The  attraction  should  be  followed 
by  an  arousing  of  interest.     How  to  present  To  attract, 
an  advertisment  in  a  way  to  arouse  the  in-  To  interest, 
terest   of   the   reader  is   the   business    of    the   writer. 
It  requires  careful  study  and  is  not  work  for  an  ama- 
teur.    Formerly   people   thought   any   one   who   could 
write   EngHsh   could  write  advertising  matter.     It  is 
surprising  how  the  development  of  the  past  twenty-five 
years    has  changed   this  view.     This  accounts  for  the 
poor  opinion  which  people  formerly  had  of  advertising. 


264  ECONOMICS  OF  BUSINESS 

Now  advertising  is  approaching  a  profession  and  re- 
quires careful  training  and  study. 

The  interest  aroused  should  be  intensified  and  pro- 
longed so  that  it  is  converted  into  a  desire  to  possess. 
To  arouse  ^^^  ^^^^^  great  problem  is  to  present  an  ad- 
desire  to  vertisement  in  such  a  way  that  it  will  arouse 
possess.  ^  ^^^  reader  a  desire  to  possess.  Many 
advertisements  attract  and  interest  but  do  not  go 
further,  while  many  carry  the  reader  to  a  desire  to  pos- 
sess, but  do  not  convince  that  it  is  beneficial  to  possess. 
When  this  has  been  done,  the  purpose  of  the  advertise- 
ment is  accomphshed.  To  attract,  to  interest,  to  cause  a 
desire  to  possess,  to  decide  to  possess  are  the  chief  aims 
of  advertising.  To  have  all  present  is  the  test  of  a  good 
advertisement  and  of  a  good  advertisement  writer. 
Many  try  to  write  advertisements  but  few  succeed. 
Advertisements  must  sell  goods  or  they  are  of  no  value 
to  the  person  advertising.  To  sell  as  many  goods  as 
possible  is  the  ambition  of  the  advertisement  writer. 
That  measures  his  worth  in  the  eyes  of  the  business 
world,  and  decides  the  salary  that  he  is  to  receive.  To 
make  an  advertisement  of  the  greatest  possible  value, 
the  aforementioned  quaUties  must  be  developed  to  the 
highest  possible  degree. 

Advertising  is  ineffective  unless  it  influences  the  reader. 
Before  an  advertisement  influences,  it  must  be  seen. 
A  good  display  of  some  kind  is  of  the  first  importance, 
Different  because  unless  an  advertisement  catches  the 
S^w°ting°'  reader's  eye,  as  he  hastily  scans  a  paper,  all 
attention.  may  be  lost.  The  problem  is  to  attract  the 
attention  of  those  likely  to  be  interested  and  not  mere 


PRINCIPLES   OF  ADVERTISING  265 

curiosity  seekers.  Various  methods  are  used  to  attract, 
but  the  adoption  of  one  depends  largely  upon  the  char- 
acter of  the  goods  to  be  advertised  and  the  class  of 
readers  which  it  is  desired  to  reach.  The  chief  methods 
are  as  follows :  illustrations ;  strong  headlines ;  strong, 
forcible  sentences  at  the  opening;  colors;  oirnaments; 
spaces;  preferred  positions;  and  type.  The  most 
common  method  employed  is  the  use  of  pictures.  Most 
people  are  attracted  by  pictures  which  serve  to  quickly 
catch  the  eye.  Pictures  may  be  divided  into  two 
classes,  those  which  illustrate  the  product  advertised, 
and  those  which  are  not  related,  but  are  used  simply 
to  attract,  and  in  no  way  explain  the  character  or  uses  of 
the  product.  The  first  class  is  called  illustrations,  and 
the  second,  pictures. 

An  illustration  is  that  by  which  an  object  is  elucidated 
or  explained.  It  should  be  designed  so  as  clearly  to 
present  the  article  and  directly  reach  the  in- 
terests  of  the  people.  Anything  which  catches  of  a  good 
the  eye  does  not  necessarily  produce  buy-  "^'*  °°' 
ing  convictions.  The  illustration  should  show  some  ad- 
vantages of  the  good  or  the  good  as  it  is.  When  an  article 
can  be  shown  in  use,  the  illustration  becomes  much 
stronger.  An  illustration  is  useless  without  selling  value, 
for  without  it,  it  ceases  to  be  an  advertising  illustration, 
and  falls  short  of  its  main  purpose.  An  illustration  should 
explain  itself.  When  it  requires  the  text  to  make  the 
meaning  clear,  it  places  an  imfair  burden  on  the  text.  It 
should  be  plain,  well-executed,  artistic  and  not  freakish, 
because  if  so,  it  detracts  from  the  copy.  A  simple, 
plain  illustration,  properly  chosen,  allows  the  eye  to 


266  ECONOMICS  OF  BUSINESS 

read  rapidly,  and  the  mind  to  easily  comprehend.  The 
choice  depends  largely  upon  the  nature  of  the  product 
to  be  advertised,  and  the  people  to  be  reached.  Some 
products,  like  automobiles,  should  always  be  advertised, 
with  illustrations.  The  eye  is  critical  and  to  be  at- 
tracted so  as  to  leave  a  favorable  impression  demands 
something  pleasing.  A  repulsive  picture  frequently  at- 
An  iUus-  tracts  but  fails  to  arouse  interest  in  the  adver- 
tration  tiscment  of  which  it  is  a  part.    An  illustration 

should  be 

pleasing  should  be  pleasing  to  the  eye  and  should  not 
to  the  eye.  qQqj^^  the  feeHngs  even  of  sensitive  people. 
Everybody  likes  to  be  reminded  of  what  is  pleasing 
and  agreeable,  while  many  turn  away  from  what  dis- 
gusts. Good  taste  should  be  exercised  in  the  choice. 
Those  which  suggest  action  are  better  than  those  which 
do  not.  An  illustration  should  never  mislead,  misrepre- 
sent, or  send  the  thoughts  in  a  wrong  direction.  It 
should  draw  and  yet  be  free  from  deceit.  Not  only 
must  an  illustration  be  carefully  selected,  but  there 
should  be  harmony  in  arrangement,  spacing,  and  in  the 
type  used.  The  following  are  a  few  effective  illustra- 
Various  tions:  the  article;  the  article  in  the  package 
good^iiius-  ^^  offered  for  sale;  the  package  alone;  a 
trations.  dainty  dish  made  from  the  article;  the 
source  of  the  article ;  processes  in  making ;  and  effect 
of  use.  A  harmonious  and  artistic  arrangement  with 
a  pleasing  illustration  connected  in  some  way  with  a 
good  copy  has  valuable  drawing  powers  in  an  advertise- 
ment. 

It  must  be  admitted  that  pictures  interest  every  one, 
young  or  old.     Formerly  many  believed  that  any  kind 


PRINCIPLES  OF  ADVERTISING  267 

of  a  picture  was  suitable,  and   that  the  only  require- 
ment for  attraction  was  a  picture,  irrespec-  _ 

r         t  .  ^  r.  l    •  •         PictUTCS. 

tive  of  what  it  portrayed.     Something  more  is 
needed  than  mere  attraction.     Many  beheve  that  all  a 
picture  has  to  do  is  to  attract ;  if  this  were  so,  pictures 
would    often   be   better    suited    than   illustrations.    A 
picture  which  simply  attracts  may  serve  to  objec- 
detract  from  the  copy.     This  is  frequently  the  tions  to 
case,  and  such  a  picture  lessens  the  value  of  an 
advertisement.     A  picture  for  a  picture's  sake  is  non- 
sensical.   An  illustration  and  not  a  picture  constitutes  a 
very  fundamental  part  of  advertising.    The  picture  must 
be  an  illustration  connecting  the  copy,  and  the  article  ad- 
vertised in  some  striking  manner.     It  must  be  interesting 
for  the  purpose  of  leading  the  reader  to  the  contents  of  the 
copy.    An  illustration  should  assist  the  text  in  making  the 
appeal  stronger.     It  requires  skill  to  properly  combine 
the  illustration  with  the  text  in  order  to  make  both  as- 
sist in  selling.     Pictures  which  are  not  illustrations  are 
of  little  value  in  advertising.     Successful  advertising  de- 
mands a  good  illustration  to  attract,  and  the  use  of 
meaningless  pictures  should  be  avoided. 

A  third  method  frequently  employed  for  catching 
the  eye  is  the  use  of  attractive  headlines.  This  is  the  use 
of  words  at  the  head  of  the  copy  of  such  a  nature  and 
form  as  to  attract  attention.  The  average  eye  cannot 
easily  take  in  at  a  glance  more  than  four  words,  so  it  is 
advisable  not  to  have  the  headline  contain  more  than 
this  number.  The  words  should  be  simple,  Headlines, 
forcible  and  suggest  some  quality  of  the  Essentials, 
article  advertised.     They  should  easily  catch  the  eye, 


268  ECONOMICS  OF  BUSINESS 

and  hold  the  attention  for  a  sufficient  time  to  allow  it 
to  read  that  which  follows.  The  type  used  should  be 
sufficiently  large  so  that  it  can  be  read  at  a  distance. 
Meaningless  words,  which  have  no  connection  with  the 
rest  of  the  copy,  should  never  be  used  as  they  are  of  no 
value  to  the  copy.  The  best  headhne  is  one  of  not 
more  than  four  forcible  words,  closely  connected  with 
that  which  follows,  and  suggestive  of  some  of  the  quahties 
of  the  article  advertised. 

In  many  cases,  neither  headlines  nor  pictures  are 
used.  The  opening  sentences  serve  as  the  attracting 
Opening  force.  They  should  be  short,  simple,  clear 
sentences      and  forcible.     Plain,  forcible  statements  about 

as  means  ^  >   i  ■,  ^         • 

of  attrac-  the  article  are  best,  but  m  every  case  a  good 
^°^'  suggestive  illustration  or  headline  greatly  in- 

creases the  attracting  power  of  an  advertisement. 

Formerly,    but    not   frequently    at    present,    writers 

thought  that  decorations  of  various  forms  and  shapes, 

even  at  times  grotesque,  attracted  the   eye. 

Decorations.    _,,  .  i      i     i  i  ^  *  r    ■» 

There  is  no  doubt  but  what  anything  out  of  the 
ordinary,  or  freakish,  obtains  a  passing  glance,  but  the  eye 
as  a  rule  sees  only  the  decorated  part,  and  passes  over 
that,  which  it  was  intended,  it  should  see  and 
read.  Decoration  if  not  flashy  or  grotesque 
possesses  some  attracting  power,  but  it  is  advisable  to 
find  other  means  of  attracting  attention. 

Attraction  to  a  copy  is  increased  by  its  place  in  the 
newspaper  or  magazine.  Certain  places  are  more 
Preferred  likely  to  be  noticed  than  others,  and  in  con- 
positions,  sequence  command  much  higher  prices.  In 
magazines,  the  standard  or  preferred  positions  are  as 


PRINCIPLES   OF  ADVERTISING  269 

follows :  back  cover  page ;  first  inside  cover  page,  front ; 
first  inside  cover  page,  back;  first  page  facing  reading 
matter ;  and  page  facing  last  page  of  reading  matter.  In 
every  case,  the  choice  of  position  and  its  relative  impor- 
tance depends  upon  the  character  of  the  goods  to  be  ad- 
vertised, and  the  kind  of  copy  that  is  used.  Preferred 
positions  are  found  in  every  medium  of  advertising,  and 
in  every  case,  the  positions  which  have  the  greatest 
chance  of  being  seen  by  the  largest  number  of  people 
command  the  higher  prices.  The  advisability  of  paying 
large  sums  for  such  places  depends  in  a  great  measure 
upon  the  product  advertised,  and  the  selling  results 
largely  depend  upon  the  form  of  copy. 

Attraction  may  be  increased  by  making  copy  plain 
and  not  crowded,  by  using  carefully  selectjed  type,  and 
plenty  of  white  spaces.    Some  advertisers  have  ^^^^ 
a  particular  style  of  type  used  only  in  their  copy,  means  of 
and  this  gives  an  individuality  which  often  at- 
tracts.    Absence  of  counter   attractions  increases   the 
chances  of  a  copy  to  be  seen.    Care  should  be  exercised  in 
choice  of  a  place,  that  is,  as  free  as  possible  from  counter 
attractions.     If  inartistic  pictures,  freakish  cuts,  or  illus- 
trated copies  are  near,  they  detract  from  the  attention, 
that  would  be  paid  to  a  copy  if  these  were  missing.     Few 
articles  are  suited  to  be  advertised  in  colors.     Colors 
are  usually  to  be  avoided,  as  they  detract  from  the  copy, 
and  lessen  the  value  of  the  advertisement. 

The  display  adopted  to  attract  should  do  more  than 
merely  catch  a  glance  of  the  eye.  It  should  hold  the  eye 
long  enough  to  get  an  interest  and  read  the  part  of 
the  copy  which  immediately  follows.     This  is  the  test  of 


270  ECONOMICS  OF  BUSINESS 

a  good  display.  It  emphasizes  the  importance  of  having 
Demands  ^  ^^^^^  ^^^  ^^^^^  Connection  between  it,  and 
of  good  the  rest  of  the  copy.  Attraction  has  no  value 
*  ^  ^'  unless  it  holds  the  eye  long  enough  to  arouse  in- 
terest and  read  what  the  copy  has  to  say.  The  display 
which  holds  and  arouses  sufficient  interest  to  read,  is  the 
one  which  tests  the  abihty  of  the  writer,  and  is  the 
one  which  is  the  most  valuable  to  the  advertiser. 

After  attention  is  gained,  the  most  vital  part  of  ad- 
vertising is  the  copy.  Copy  is  a  technical  name  given 
to  the  text-matter  of  an  advertisement.  Many 
make  the  mistake  of  making  the  illustration 
do  all  the  work,  and  pay  little  heed  to  the  copy.  A  good 
illustration  attracts  the  attention  long  enough  for  the 
eye  to  read  the  copy  which  contains  the  selling  points 
expressed  in  a  way  to  convince  the  reader  to  buy  the 
Close  reia-  article.  There  should  be  a  close  connection 
tion  be-         between  the  idea  brought  out  by  the  illustra- 

tweencopy        .  ^     ■,         ^  ■,  ^    >        ^ 

anduius-  tion,  and  the  thought  expressed  m  the  copy, 
tration.  ^  g^^^  advertisement  is  not  one  that  people 
talk  about,  but  one  that  they  act  upon.  This  demands 
a  good  copy,  assisted  by  a  good  illustration  in  making  the 
appeal. 

The  chief  preparation  in  the  writing  of  copy  is  to  pick 
out  the  selling  points  of  the  article  to  be  advertised. 
Importance  ^^^ple  wish  to  know  facts,  and  the  informa- 
of  selling  tion  given  should  be  confined  to  plain  facts, 
poms.  Brevity   is   a   virtue   in    advertising,  but   it 

should  not  be  such  as  to  omit  vital  information.  A  copy 
should  always  be  interesting  and  never  tiresome.  Facts 
should  be  put  in  proper  logical  order,  but  if  care  is  not 


PRINCIPLES   OF  ADVERTISING  271 

exercised,  there  is  likely  to  be  a  hard,  metalHc  ring.     A 
copy  should  be  written  in  a  natural,  informal  and  col- 
loquial  style,   and   full   of    human   interest,  jj^j^^^^ 
The  writer  who   can  put  into   his   copy   a  interest  in 
soothing,  personal  touch,  and  make  the  ap-  ^^^^' 
peal  human  has  a  valuable  quality. 

The  copy  should  be  written  in  clear  and  simple  lan- 
guage. Arguments  should  be  confined  to  facts  about 
the  article,  forcible,  clear  and  convincing.  Essentials 
Unsupported  and  unconnected  statements  for  a  good 
have  no  place  in  a  copy.  Sentences  should 
be  short,  concise  and  pointed.  Long  words  and  long 
sentences  should  in  every  instance  be  avoided.  Every- 
thing told  in  copy  should  be  so  simple,  and  in  such  clear 
language,  as  not  to  require  either  time  or  study  to  be 
easily  understood  by  the  average  reader.  The  selling 
points  should  be  so  forcibly  expressed,  and  so  clearly 
stated,  that  their  full  import  can  be  immediately  grasped. 
Everything  should  be  specific,  as  nothing  is  more  tiresome 
than  wordy  generalities.  People  are  not  interested  in  a 
pretty  picture  or  novel  combination  of  words,  but  want 
to  know  how  to  get  value  for  their  money.  If  a  writer 
pays  heed  to  this,  and  makes  his  advertisement  answer 
the  following  questions,  he  will  be  successful  in  making 
his  advertisement  sell  goods.  Does  the  advertisement 
create  a  need  and  desire  for  the  article  ?  Does  the  ad- 
vertisement convince  the  reader  that  the  article  ad- 
vertised is  the  one  to  buy?  Are  the  special  merits  so 
forcibly  told  as  to  become  strongly  fixed  in  the  mind  of 
the  reader  ?  The  copy  is  good  in  proportion  as  it  makes 
a  terse,  reasonable  appeal  to  the  reader,  and  makes  him 
decide  to  buy. 


272  ECONOMICS  OF  BUSINESS 

An  advertisement  which  entertains  the  eye,  and  does 
not  make  an  impression  will  not  make  sales.  The  mind 
The  adver-  ^^^  ^^^  peculiar  faculty  of  seeing  things  with- 
tisement        out  Spending  any  thought  upon  them.    A  per- 

should  not  11^  11  r 

only  enter-    son  can  look  at  a  crowd,  and  see  many  faces, 

tain  the  eye   ^^^  j^^g  mind  may  be  far  away.   The  advertise- 
but  must  .  -^  -^ 
make  an       ment  which  Only  gets  attention,  but  does  not 

impression,  pg^etrate  the  reasoning  powers,  has  httle  value. 
The  average  person  when  he  sees  an  advertisement 
is  in  a  more  or  less  indifferent  mood,  and  his  thoughts 
are  as  a  rule  on  other  things.  He  may  give  it  a  casual 
glance,  but  does  not  vacate  his  mind  to  the  thought 
which  it  suggests.  The  arguments  must  penetrate  and 
make  a  favorable  impression,  or  the  purpose  of  the  ad- 
vertisement is  lost. 

One  weakness  of  many  advertisements  is  lack  of  ap- 
peal to  the  senses,  and  the  reasons  for  this  defect  are 
An  adver-  twofold.  An  appeal  to  any  sense  except 
tisement       sight  is  not  easily  made  in  type.     Secondly, 

should  °  .  ''         ,,.  .  ,  .. 

appeal  to  many  writers  are  lacking  in  descriptive 
the  senses.  pQ^gj-g^  ^nd  Cannot  describe  articles  in  a  way 
to  appeal  to  the  senses.  The  chief  quality  of  an  article 
of  food  is  taste.  Many  never  think  of  this,  and  pay 
no  attention  to  taste,  but  describe  a  food  product  as 
though  it  had  none.  How  much  more  impressive  would 
it  be  to  make  the  advertisement  bespeak  some  superb 
quality  or  daintiness,  and  impart  such  a  zest,  that  it 
makes  the  mouth  water,  and  one  feel  as  though  he 
must  stop  on  the  way  home  and  buy  the  article.  Few 
advertisers  appreciate  the  weakness  of  the  ordinary 
man  and   woman   for   good    things    to   eat.      Writers 


PRINCIPLES   OF  ADVERTISING  273 

should  describe  foods  in  such  a  way  that  readers  im- 
mediately want  what  they  describe.  Every  adver- 
tisement of  food,  to  make  a  strong  appeal,  should 
emphasize  taste.  Pianos  are  frequently  advertised  as 
though  they  had  no  tone,  perfumery  as  though  no  smell, 
and  shoes  as  though  no  comfort  in  the  wearing.  Where- 
ever  possible,  an  advertisement  should  appeal  directly 
to  the  senses,  and  when  a  writer  is  able  to  do  this,  the 
selling  powers  of  the  advertisement  are  greatly  increased. 

Many  copies  are  written  in  such  a  way  that  the  state- 
ments made  may  apply  to  many  articles.  The  copy 
should  possess  personality.  The  statements  individual- 
made  about  an  article  should  individualize  **y  *°  *^®py- 
the  article,  and  be  of  such  a  nature,  that  they  cannot 
be  used  for  any  other.  This  requires  a  mastery  of 
English,  and  abihty  to  express  the  salient  points  of  an 
article  in  a  way  which  is  restricted  to  it.  The  power  to 
do  so  is  a  valuable  asset  to  a  copy  writer. 

Confusion  frequently  arises  between  advertisements 
which  advertise  different  kinds  of  goods.  It  is  sur- 
prising how  many  people  confuse  adjacent  copies. 
Many  writers,  to  avoid  confusion,  mark  their  . 

advertisements  by  borders.  Plain  borders,  inadver- 
if  not  too  decorative,  may  be  used  advanta- 
geously, but  wide  spaces  serve  the  same  purpose.  If  the 
writer  would  take  special  pains  to  individuahze  his  copy, 
and  make  it,  and  the  display  distinctive,  so  that  it  would 
be  difficult  to  interpret  it  in  any  way  except  as  the  writer 
desired,  it  would  avoid  a  considerable  part  of  the  confu- 
sion. The  name  and  address  of  the  advertiser  should  be 
clearly  and  plainly  given.    Many  advertisers  fail  to  recog- 


274  ECONOMICS  OF  BUSINESS 

nize  this  and  others  gain  from  their  advertisements.  Those 
who  fail  to  put  their  names  in  larger  type  or 

Prominence     .  ,...        .  iti 

given  to  m  some  distinctive  form  would  be  surprised, 
adSes^*^  if  they  knew  how  many  possible  buyers  read 
of  adver-       their  advertisements,  and  fail  to  notice  the 

advertiser's  name.  Too  great  emphasis  can- 
not be  placed  upon  making  the  advertisement  distinctive, 
and  having  the  name  of  the  advertiser  prominently  and 
conspicuously  given.  These  are  the  two  great  factors 
to  observe  in  order  to  prevent  confusion  and  loss  by 
readers  not  noticing  the  names  of  advertisers. 

Many  writers  try  to  crowd  too  much  into  a  copy. 

It  is  advisable  to  advertise  one  article  or  a  few 

Crowding 

should  be  allied  articles  at  a  time.  A  crowded  copy 
printed  in  small  type  is  very  often  not  read. 
Repetition  is  an  important  factor  in  advertising,  as 
interest  in  an  article  is  often  aroused  by  the  number  of 
Value  of  times  it  comes  to  the  attention  of  a  prospective 
repetition,  buyer.  To  exactly  repeat  the  copy  every 
time  makes  it  lacking  in  interest;  nevertheless  the  re- 
taining of  one  or  more  prominent  features  serves  as  a 
connecting  link,  and  emphasizes  the  fact,  that  the  same 
firm  is  placing  the  article  upon  the  market.  A  trade 
name  or  trade-mark  emblem  is  good  in  an  advertisement, 
as  it  gives  something  concrete  around  which  the  popular 
conception  of  the  advertising  institution  can  be  built. 
As  people  become  acquainted  with  a  constantly  adver- 
tised emblem,  it  becomes  a  valuable  asset.  Different 
arguments  or  different  goods  should  be  emphasized  in 
every  advertisement.  The  advertisement  which  retains 
some  recognizable  features,  but  varies  in  detail  from  time 


PRINCIPLES  OF  ADVERTISING  275 

to  time  serves  as  the  best  drawing  one.  There  is  a 
similarity  which  shows  that  the  seUing  firm  is  the  same, 
but  at  the  same  time,  there  is  a  sufficient  change  from 
time  to  time  to  avoid  monotony. 

An  article  to  be  successfully  sold  through  advertising 
should  contain  some  merit.     Advertising  cannot  make 
merit  where  it  does  not  exist.     Misrepresenta-  j^^^^ 
tion  and  falsehood  rebound  with  triple  force  necessary  in 
upon  the  advertising  firm.    The  average  Ameri-  ^^ 
can  buyer  is  a  good  judge  of  values,  and  knows  if  what 
is  said  about  an  article  is  true  or  false.     The  Truth  is 
public  may  be  fooled  once,  but  it  does  not  for-  essential, 
get.     Every   statement    made    concerning    an    article 
should  be  positive  information  and  plain  truth.     Truth 
is  the  foundation  of  confidence,  and  over  90  per  cent  of 
the  world's  trade  is  done  on  confidence.     Anything  but 
the  truth  lowers  the  dignity  of  a  firm,  and  lessens  one  of 
the  most  valuable  assets  of  a  business  house,  —  the  con- 
fidence of  the  people. 

Space  in  a  medium  is  costly  and  should  be  used  to 

the  best  advantage.     Advertising  is  a  waste  of  money 

unless    some    positive    returns    follow.    The 

Space, 
amount  of  space  to  be  used  should  be  decided 

by   the   business   man   advertising.     Decision   depends 

upon  the  goods  to  be  sold,  the  public  to  be  reached,  and 

the  kind  of  medium  used.     The  size  of  space  varies 

according  to  the  means  of  the  advertiser.     It  is  seldom 

advisable  to  go  to  either  extreme,  but  to  be  uniform  in 

the  amount  of  space  used.     Size  of  space  does  not  sell 

goods,  but  that  depends  entirely  upon  what  the  space 

contains.    Judgment  should  be  exercised  in  the  selec- 


276  ECONOMICS  OF  BUSINESS 

tion  of  space,  and  skill  should  be  used  in  filling  the 
space  with  suitable  copy.  In  advertising  a  new  arti- 
Essentiais  ^^^'  ^^  ^^  frequently  advisable  to  make  a 
for  seiec-  big  display,  and  then  reduce  to  smaller  copy. 
With  a  certain  amount  for  publicity,  it  is  far 
better  to  have  a  small  copy  continuously  than  a  large 
display  occasionally. 

The  buying  public  is  always  prejudiced  against  spas- 
modic advertising.  It  usually  arouses  the  suspicion 
that  the  purpose  of  the  advertiser  is  to  deceive.  Con- 
Advertising  fidence,  on  the  other  hand,  is  aroused  by  con- 
shouidbe      tinuity  in  advertising.     It  gives  the  impres- 

continuous        ......  . 

and  not  sion  of  stabihty  and  permanence,  and  people 
spasmodic,  j-gspgct  these  qualities  in  a  business  house. 
Are  seasonal  goods  to  have  only  seasonal  advertising? 
This  depends  upon  the  character  of  the  goods.  It  would 
be  folly  to  advertise  Christmas  and  Easter  novelties 
except  in  season.  Again,  it  is  a  waste  of  money  to  adver- 
tise skates  and  sleds  in  summer,  or  swimming  suits  and 
straw  hats  in  winter.  With  goods  like  summer  under- 
wear, it  is  advisable  to  advertise  the  year  roimd.  It 
keeps  the  goods,  and  the  name  of  the  sellers  before  the 
public,  and  the  continual  reminding  bears  fruit,  when 
the  season  arrives.  The  advertising  of  such  goods  when 
not  in  season  carries  considerable  weight  with  the  public, 
and  gives  the  idea  of  value  in  the  goods,  and  permanency 
in  business.  If  such  is  not  the  case,  people  think  that 
it  would  not  pay  to  advertise.  It  is  poor  advertising  to 
use  large  copy  one  day  and  none  the  next,  as  a  product 
should  be  kept  continually  before  the  public.  Successful 
advertising  is  continuous  and  not  spasmodic. 


PRINCIPLES   OF  ADVERTISING  277 

A  copy  writer  should  thoroughly  know  the  goods  to 
be  advertised,  as  a  careful  knowledge  of  goods  is  as 
necessary  as  it  is  in  selling.  A  salesman  should  Knowledge 
know  good  selling  points  of  his  goods,  so  that  °^  2°°**^* 
he  may  be  efficient  in  seUing.  A  copy  writer  should  be 
master  of  the  selling  points  of  his  goods,  and  be  able 
to  express  them  in  good,  plain,  forcible  words,  so  that 
they  arouse  interest  and  attention,  and  make  the  public 
decide  to  buy.  Many  writers  serve  some  time  in  the 
factory  producing  the  goods  to  be  advertised.  Some 
occasionally  visit  factories  making  the  same  kind  of 
goods  as  well  as  make  frequent  visits  to  their  own. 
A  copy  writer  should  be  a  close  student  of  human 
nature.  He  should  know  the  classes  whe^  buy  his  goods. 
This  is  absolutely  necessary  because  an  advertisement 
which  will  appeal  to  one  class  will  not  to  Knowledge 
another.  A  writer  should  know  the  likes  and  ®^  buyers, 
dislikes  of  his  buyers.  This  enables  him  to  select  those 
selling  points  which  appeal,  and  to  present  them  in  a  way 
to  interest  and  convince.  A  copy  writer  should  not  for- 
get that  he  is  presenting  the  selling  qualities  to  convince 
the  buyer.  This  is  important  because  frequently  space 
is  taken  in  flattering  the  president,  or  some  member  of 
the  firm.  Space  so  taken  represents  so  much  loss.  The 
sole  consideration  is  the  article  advertised,  and  the 
aim  is  to  present  it  to  buyers  in  the  most  attractive 
and  most  convincing  manner  so  that  goods  will  be  sold. 

A  person  is  judged  by  the  company  he  keeps,  and  the 
same  is  true  of  advertising.  An  advertisement  fuses  more 
or  less  with  the  medium  in  which  it  appears.  Many  me- 
diums advertise  only  cheap  inferior  goods,  while  others 


278  ECONOMICS  OF  BUSINESS 

advertise  those  of  the  highest  grade.  Suspicion  is  at 
Quality  of  once  cast  upon  the  quaHty  of  diamonds  if 
STd  !l^de  advertised  in  a  medium  filled  with  advertise- 
^se.  ments  of  cheap  jewelry.    A  person  advertising 

an  article  should  select  the  medium  where  articles  of  the 
same  quality  are  advertised.  It  is  a  waste  of  money 
for  a  seller  of  cheap  jewelry  to  advertise  in  The  Ladies* 
Home  Journal  or  a  seller  of  diamonds  in  Comfort. 

The  question  often  arises  as  to  what  are  the  best  draw- 
ing points  of  an  article.  The  selection  of  the  drawing 
Drawing  points  varies  to  a  certain  extent  with  the  arti- 
advertise-  ^^^  advertised.  Those  for  one  article  may 
ment.  not  be  possible  for  another.     The  selection 

should  be  left  to  the  discretion  and  judgment  of  the  copy- 
writer. A  number  of  good  drawing  points  as  arranged 
by  a  well  known  authority  is  as  follows:  wholesome- 
ness ;  durability ;  reliability  of  firm ;  pleasure  connected 
with  use  of  article ;  and  popularity  of  use.  The  following 
used  by  many  copy  writers  are  examples  of  bad  taste : 
boasting;  letters  of  recommendation;  accounts  of  the 
prosperity  of  the  firm ;  and  the  extent  of  the  plant. 
One  of  the  first  class  tends  to  increase  the  confidence  of 
the  people,  and  this  assists  in  making  a  decision  to  buy, 
while  one  of  the  second,  arouses  suspicion  and  de- 
creases the  value  of  an  advertisement. 

A  command  upon  the  reader  to  use  the  article  adver- 
tised can  frequently  be  made  advantageously  in  the 
Direct  com-  ^^Py*  ^  person  ordinarily  resents  receiving 
mand:  its  a  command  to  do  an  act.  Nevertheless,  he 
unpo  ce.  Q£|.gj^  refuses  to  obey  the  command,  and  yet 
later  does  the  very  thing  refused,  forgetting  that  the  com- 


PRINCIPLES   OF   ADVERTISING  279 

mand  to  act  had  been  previously  received,  and  now  believ- 
ing that  he  is  acting  upon  his  own  initiative.  Many- 
people  can  suggest  the  doing  of  an  act  in  such  a  way,  that 
the  person  commanded,  does  so  without  realizing  that  he 
is  following  the  command  of  another.  If  a  writer  can  in 
a  few,  simple,  direct,  suggestive  words  force  his  command 
upon  a  reader,  so  that  he  acts  unconsciously,  he  possesses 
a  valuable  power.  A  command  so  worded  can  frequently 
be  used  advantageously  and  increases  the  drawing  power 
of  a  copy. 

Advertisers  have  always  found  it  difficult  to  measure 
results   from   advertisements   in   various   publications. 
''Please  mention  this  magazine"  was  formerly  j^^^g  ^^ 
the  only  method,  and  is  still  extensively  i^ed.  measuring 
Later,  the  person  answering  the  advertisement  ^"    "  ^* 
was  asked  to  cut  it  out,  and  send  to  the  advertiser. 
Finally  it  was  discovered  that  the  name  was  suflScient,  so 
a  blank  in  the  advertisement  was  left  for  name  and  ad- 
dress with  directions  to  send  this.     This  is  the  origin  of  the 
return  coupon,  which  was  originally  intended 

-    ,       .    .        .    -.  .  ,  ,       The  coupon. 

as  a  means  of  obtammg  mformation  about  the 
extent  of  the  publicity  of  advertisements.  The  adver- 
tiser soon  discovered  that  the  coupon  possessed  great 
value  in  obtaining  inquiries.  Frequently  a  coupon 
makes  an  appeal,  and  induces  the  reader  to  answer  an 
advertisement,  and  if  it  were  not  present,  many  would 
not  trouble  themselves  about  answering.  The  dotted 
lines  marking  off  a  coupon  attract  attention,  and  the 
coupon,  at  the  same  time,  makes  it  easy  to  answer  an 
advertisement.  The  return  coupon  is  an  important 
factor  in  advertising  and  deserves  careful  consideration. 


28o  ECONOMICS  OF  BUSINESS 


QUESTIONS 

1.  What  is  the  function  of  advertising  in  our  industrial 
system  ?    Account  for  its  rapid  growth. 

2.  What  are  the  differences  between  national  and  direct 
advertising  ?     Give  the  essentials  of  each. 

3.  In  what  way  is  advertising  a  creative  force  in  business  ? 
How  is  it  used  to  maintain  the  stability  of  a  business  ? 

4.  What  are  the  aims  in  advertising  ?  Give  the  essentials 
necessary  for  each. 

5.  Name  the  different  methods  to  attract  attention. 
What  are  the  essentials  in  the  choice  of  a  method  ? 

6.  What  is  the  function  of  an  illustration?  Why  are 
illustrations  preferred  to  pictures?  Why  are  mere  pictures 
objectionable  ? 

7.  What  is  a  copy  ?  What  are  the  fundamentals  in  copy 
writing  ? 

8.  Why  does  appealing  to  the  senses  increase  the  drawing 
power  of  an  advertisement  ? 

9.  What  is  individuality  in  a  copy  ?  Give  its  importance. 
How  is  it  obtained  ? 

10.  Give  the  value  of  repetition  in  advertising.    How 
can  it  best  be  obtained  ? 

11.  Why  is  continuity  in  advertising  important?    What 
are  the  objections  to  spasmodic  advertising  ? 

12.  Why  is  a  knowledge  of  the  goods  essential  to  the  copy 
writer  ?    How  is  it  best  obtained  ? 

13.  What   are   good   drawing   points?    Mention   several 
mistakes  made  in  the  selection  of  drawing  points. 

14.  What  is  direct  command?    When  can  it  be  advan- 
tageously used  ?    What  care  should  be  taken  in  its  use  ? 

15.  What  is  the  function  of  the  coupon  in  advertising? 
Give  its  evolution.    How  does  it  assist  in  making  the  appeal  ? 


PRINCIPLES   OF   ADVERTISING  281 

REFERENCES 

W.  D.  Scott,  "The  Theory  of  Advertising";  T.  A.  De- 
Weese,  ''The  Principles  of  Practical  PubUcity";  H.  N. 
Casson,  "Ads  and  Sales";  A.  P.  Johnson,  "Library  of  Ad- 
vertising"; William  A.  Shryer,  "Analytical  Advertising"; 
S.  E.  Sparling,  "Business  Organization,"  Ch.  XIII;  H. 
Bridgewater,  "Advertising,"  Chs.  I-IX;  T.  D.  MacGregor, 
"Pushing  Your  Business,"  Ch.  I;  F.  A.  Parsons,  "The  Prin- 
ciples of  Advertising  Arrangement";  "Business  Administra- 
tion," edited  by  W.  D.  Moody,  Vol.  Ill;  N.  C.  Fowler, 
"Building  Business,"  Chs.  I-IX;  G.  French,  "Art  and 
Science  of  Advertising";  W.  D.  Scott,  "The  Psy- 
chology of  Advertising";  Calkins  and  Holden,  "Modern 
Advertising";  E.  T.  Page,  "Advertising";  G.  H.  Powell, 
"Powell's  Practical  Advertiser";  E.  BalraTer,  "The  Science 
of  Advertising";  E.  W.  Coleman,  "Advertising  Develop- 
ment"; P.  T.  Cherington,  "Advertising  as  a  Business 
Force" ;  D.  Starch,  "Principles  of  Advertising." 


CHAPTER  XIII 

MEDIUMS   OF  ADVERTISING 

An  advertisement  should  not  only  be  properly  written, 
but  be  displayed  where  prospective  buyers  can  read  it. 
Anything  used  to  display  an  advertisement 
is  a  medium.     Mediums  are  of  many  varieties 
and  include  magazines,  catalogues,  newspapers,  trade 
journals,  booklets,  house  organs,  letters,  calendars,  blot- 
ters, handbills,  billboards,  electric  displays,  street  cars 
and  novelties.     Each  has  a  distinctive  value 

Varieties. 

in  itself.  One  may  be  especially  adapted  for 
the  presenting  to  the  public  of  one  article  and  not  be 
suited  to  another.  The  medium  chosen  should  be  one 
which  will  be  read  by  the  people  from  whom  future 
buyers  can  be  obtained.  Success  in  advertising  depends 
not  only  upon  the  writing  of  the  advertisement,  but  also 
upon  the  choice  of  the  medium  to  reach  prospective 
buyers. 

The  choice  of  a  medium  demands  a  thorough  study  of 
the  article  to  be  advertised  and  the  people  to  be  reached. 
Essentials  The  method  of  distributing  goods  to  be  ad- 
choice  of  a  vertised  demands  careful  attention.  Goods 
medium.  distributed  directly  to  consumers  require  dif- 
ferent mediums  from  those  sold  to  jobbers.  Advertise- 
ments for  the  purpose  of  creating  or  maintaining  a  general 
demand  require  different  mediums  from  those  used  to 

282 


MEDIUMS   OF  ADVERTISING  283 

cause  direct  demand.     Another  important  consideration 

is  the  class  of  people  to  be  reached.    An  article  should  be 

advertised  in  the  medium  read  by  the  people  to  whom 

sales  are  expected  to  be  made.    To  decide  upon  the 

proper  medium,  careful  attention  should  be  paid  to  the 

method  of  distribution,  the  character  of  the  article  to  be 

advertised,  and  the  classes  of  people  to  be  reached. 

Some  people   call  monthly   pubHcations  magazines, 

and  weekly,  periodicals.     A  weekly  with  a  nation-wide 

circulation,  Kke  the  Saturday  Evening  Post,  „ 

•  t»  ^    Magazine. 

has,  as  far  as  advertising  is  concerned,  the 
chief  characteristics  of  a  magazine,  while  the  local  weekly 
paper  has  those  of  a  daily  newspaper.  Periodicals  may 
be  dismissed  with  the  mention  that  ^hose  possessing 
a  wide  circulation  will  be  classed  as  magazines,  and 
those  with  a  local  circulation  as  newspapers.  The  maga- 
zine offers  a  distinct  field  for  advertising.  It  is  the 
chief  medium  used  for  creating  demand  and,  as  such,  is 
the  favorite  one  with  manufacturers.  With  the  recent 
development  of  the  mail-order  business,  the  characteris- 
magazine  has  come  into  favor  as  especially  magazine 
adapted  to  it.  The  magazine  has  a  wide  cir-  advertising, 
culation,  and  is  of  service  in  advertising  those  articles 
for  which  it  is  intended  to  create  a  general  demand  or  to 
sell  over  a  large  area.  The  average  life  of  a  magazine 
is  from  three  to  twelve  weeks.  People  usually  read  it  at 
their  leisure,  and  if  anything  attracts  them,  take  time  to 
carefully  read  and  reflect.  Magazines  are  printed  on 
better  paper  than  newspapers  and  as  such  offer  oppor- 
tunities for  higher  grade  illustrations.  One  disadvantage 
is  the  time  required  to  have  copy  ready  in  advance  for 


284  ECONOMICS  OF  BUSINESS 

appearance  in  the  following  issue.  If  the  goods  adver- 
tised are  subject  to  sudden  changes,  as  a  result  of  trade 
or  other  conditions,  a  serious  change  may  take  place  be- 
tween the  time  the  advertisement  is  presented,  and  the 
date  of  its  appearance.  Magazines  vary  in  quality  and 
standard  from  Comfort  to  The  Ladies^  Home  Journal, 
Between  these  two  extremes,  there  are  many  grades 
which  are  read  by  different  classes  of  people.  The 
charges  in  each  vary  with  the  circulation  and  the 
standard  of  the  classes  who  read  the  magazine. 

The  newspaper  and  the  magazine  are  the  two  chief 
mediums  in  advertising.  The  newspaper  is  a  very 
profitable  medium  when  the  article  advertised 
has  a  local  demand.  Local  merchants  find  it 
indispensable  in  giving  publicity  to  their  goods.  The 
average  newspaper  has  a  life  of  a  day  and  it  is  read  by 
people  in  a  hurry  and  those  who  do  not  take  time  to 
Character-  reflect.  The  advertisement  should  be  simple, 
!f™JlL.     clear  and  direct.     Too  many  articles  should 

newspaper  -^ 

advertising,  not  be  advertised  at  once  as  it  is  advisable 
to  make  daily  specialties.  If  advertising  a  single  article, 
too  many  arguments  should  not  be  used  in  one  issue, 
because  it  is  better  to  confine  each  issue  to  one  or  two. 
Small  type  should  always  be  avoided.  The  type  used 
should  be  of  sufficient  size  to  allow  the  copy  to  be  easily 
read.  Cuts  of  specialties  are  very  desirable.  A  very 
important  factor,  and  one  which  should  be  especially  em- 
phasized, is  the  price.  Price  is  often  a  great  drawing 
power.  Merchants  make  a  practice  of  having  one  or 
more  leaders,  with  reductions  in  price  to  induce  people^ 
to  come  to  their  store  to  buy.    An  easily  readable  ad- 


MEDIUMS   OF   ADVERTISING  285 

vertisement  and  attractive  prices  are  the  two  important 
features  of  local  advertising. 

The  character  of  a  newspaper  is  determined  by  finding 
out  the  class  of  people  who  read  it.     The  newspaper  is 
read  by  large  and  varied  classes.    As  there  standards 
are  many  different  classes  of  people,  so  there  of  news- 
are  different  standards  of   papers.     In  large  ^^^^^^' 
cities,  there  is  no  absolute  rule  to  be  followed  in  the  choice 
between  morning  and  afternoon  papers.     A  decision  can 
be  made  only  after  a  study  of  the  habits  of  the  people  and 
of  the  goods  to  be  advertised.    Advertising  that  is  to  be 
quickly   effective   must   include   daily   papers.     News- 
papers fill  a  distinctive  demand  for  local  advertising,  and 
extreme  care  should  be  taken  in  selecting  a  paper  which 
is  read  by  the  people  to  whom  the  advertiser  wishes  to 
sell  the  goods  advertised. 

The  trade  journal,  as  the  name  implies,  is  a  paper  pub- 
lished in  the  interests  of  a  particular  trade,  or  line  of 
business.     Every  trade  or  business  of  impor-  Trade 
tance  has  its  distinctive  trade  journal.     The  Journal, 
circulation  is  small  as  compared  with  magazines  or  news- 
papers.    The  readers  are  interested  in  everything  con- 
nected with  the  trade  or  business  which  the  paper  repre- 
sents.    If  advertising  is  confined  to  goods  of  its  limited 
the  trade,  the  advertiser  can  be  certain  that  an  ^®^^* 
appeal  will  be  made  to  persons  interested  in  them.     The 
trade  paper  reaches  probable  buyers,  and  as  such,  forms 
a  valuable  medium  for  advertising.     Manufacturers  ad- 
vertise extensively  to  reach  the  consumer  and  increase 
the  demand  for  their  products.     They  in  turn  use  the 
trade  journal  to  reach  dealers  and  jobbers  in  order  to 


286  ECONOMICS  OF  BUSINESS 

interest  and  convince  them  to  carry  the  goods.  Trade 
journals  are  receiving  greater  prominence  as  advertising 
mediums,  and  are  being  more  extensively  used  by  manu- 
facturers and  jobbers. 

In  selling  by  mail,  the  booklet  has  a  special  field  and 

is  a  necessity.    As  the  name  implies,  it  is  a  little  book 

of  usually  not  more  than  ten  thousand  words 

Booklet. 

nor  less  than  two  thousand,  published  by  a 
manufacturer,  jobber,  or  retailer  to  assist  in  selling  his 
goods.  Booklets  differ  in  shape,  size  and  form.  Oddity 
in  size  may  with  certain  goods  possess  some  attractive 
features,  but  business  men  usually  find  the  simple  book 
form  preferable.  The  average  customer  wishes  to  learn 
facts  about  goods,  and  is  attracted  by  having  them  pre- 
sented in  a  simple,  businessUke  way.  The  present  tend- 
ency in  advertising  is  toward  simplicity  in  presentation. 
Simple,  forceful  business  methods,  stating  facts  and  giv- 
ing arguments  why  goods  should  be  purchased,  give 
the  best  results,  and  should  be  strictly  followed  in 
booklets.  The  outward  appearance  deserves  attention, 
and  frequently  decides  whether  or  nSt  a  booklet  is  to  be 
read  before  being  discarded  to  the  waste-paper  basket. 
A  booklet  should  be  made  of  a  fine  quaUty  of  paper,  and 
neat  in  appearance.  Good  paper,  workmanship  and  taste 
tiais  ^  selecting  illustrations  make  a  booklet  refined 
for  in  appearance  and  attractive.     Elaborate  de- 

appearance,  coigns,  flashy  colors,  and  freakish  pictures 
should  in  every  instance  be  avoided.  Many  prefer  to 
have  the  cover  contain  a  good  half-tone  picture  illustrat- 
ing in  some  way  the  good  to  be  sold.  Many,  however, 
prefer  a  plain  colored  cover  with  gilt  lettering  and  edges. 


MEDIUMS   OF  ADVERTISING  287 

A  booklet  should  attract,  interest,  arouse  desire  to 
possess,  and  convince  the  reader  to  buy.  The  greater 
part  of  the  selling  must  be  borne  by  it.  Many  ggg^j^^j^g 
booklets  miss  this  main  purpose,  and  are  dry,  in  writing 
uninteresting,  rambling,  and  obscure,  and  as  *  °®  ®** 
such,  are  a  waste  of  money.  Short  interesting  stories 
should  be  written  explaining  something  about  the  arti- 
cle in  the  making  or  in  use.  Every  story  should  be  woven 
around  the  article  and  bring  out  some  important  quality 
or  selling  point.  The  story  should  be  told  in  a  conversa- 
tional, simple,  interesting  and  direct  way.  Two  or  three 
such  stories  may  be  included  in  a  booklet.  Every  pur- 
chaser is  interested  in  knowing  facts,  and  the  presentation 
of  these  in  a  story  requires  considerable  ability.  The 
story  should  be  supplemented  with  good  half-tone 
illustrations,  illustrating  in  some  way  the  article.  Book- 
lets connected  with  the  sale  of  food  products  may  give 
uses  and  illustrations  of  dishes  made  therefrom.  This 
increases  their  importance  to  the  housewife  and  insures 
their  preservation.  The  booklet  if  properly  written  is 
a  strong  force  in  sciHng.  Many  advertisers  make  use  of 
a  serial  booklet,  that  is,  instead  of  making  the  appeal  in 
one  booklet,  three  or  four  are  used.  Each  should  present 
in  an  interesting  way  important  selling  points  of  the  good, 
and  should  follow  one  another  at  short  intervals.  They 
should  be  sufficiently  attractive  and  interesting  to  be  read, 
and  should  be  of  such  a  nature  as  to  bring  out  in  logical 
order,  the  chief  selling  points  of  the  goods.  The  book- 
lets should  be  accompanied  by  good  personal  letters,  and  if 
such  are  used,  the  serial  booklet  may  possess  greater  draw- 
ing power,  and  carry  more  conviction  than  the  single  one. 


288  ECONOMICS  OF  BUSINESS 

There  are  three  classes  of  persons  to  whom  booklets 
are  sent:  first,  those  who  use  the  goods  advertised 
Classes  to  and  are  always  ready  to  buy ;  secondly,  those 
whom  sent,    ^j^q  ggj^^j  £qj.  q^q  ^^^  ^^^  interested ;  thirdly, 

those  who  are  only  Kkely  to  buy  and  are  sent  a  copy 
with  a  view  to  arousing  interest.  The  first  class  will 
be  always  more  or  less  interested  in  the  booklet  as  long  as 
it  presents  facts  in  an  interesting  way.  Persons  who 
send  for  a  booklet  will  likely  send  for  those  of  competitors, 
comparison  will  be  made  and  each  must  hold  its  own 
Demands  of  not  only  in  appearance,  but  in  the  presenta- 
bookiet.         ^[q^  q£  £^(,|.g  g^j^jj  arguments,  as  to  why  its 

article  should  be  purchased  in  preference  to  all  others. 
An  attractive,  interesting  and  forceful  presentation  of 
the  selling  points  of  an  article  should  be  the  characteris- 
tic of  a  booklet,  in  order  that  it  may  serve  its  purpose  to 
attract,  arouse  and  convince.  Booklets  should  not  be 
distributed  promiscuously,  but  care  should  be  taken  to 
reach  prospective  buyers.  A  too  free  distribution  lessens 
their  force  with  the  public.  Good  judgment  and  ex- 
treme care  not  only  in  preparation,  but  distribution  adds 
to  the  selling  force  of  every  booklet. 

One  of  the  recent  developments  in  advertising  is  the 
The  house  house  Organ.  It  is  a  publication,  usually  is- 
organ.  g^g^j  monthly  by  a  manufacturer,  jobber  or 

retailer  in  the  interest  of  his  particular  business.  The 
ordinary  newspaper  or  magazine  form  is  best  to  attract 
and  hold  the  attention  of  the  people.  The  latter  seems 
to  be  preferred  but  the  size  is  usually  much  smaller  than 
the  ordinary  magazine.  The  house  organ  has  proved 
profitable   and  is   a   popular   method    of   advertising. 


MEDIUMS   OF  ADVERTISING  289 

Thousands  of  these  little  magazines  are  published  monthly 
and  are  issued  in  every  state  in  the  union. 

House   organs  may  be   divided  into   three   distinct 
classes:   for  agents,  salesmen  and  branches;  for  con- 
sumers; and  for  dealers.     The  first  class  is  Q^ssesof 
distinct  in  itself,  and  is  not  nearly  so  diffi-  house 

1  .  11  -r        •  •        organs. 

cult  to  write  as  the  other  two.  It  gives  m- 
structions,  offers  suggestions,  and  discusses  new  ideas 
and  matters  pertaining  to  the  business  in  general.  In- 
terest is  maintained  by  articles  on  salesmanship,  advertis- 
ing and  other  subjects  closely  allied  to  the  particular  busi- 
ness. Frequently  important  information  of  a  general 
nature  is  found.  The  hardest  task  comes  in  writing  a 
publication  that  will  appeal  to  consumers  and  j^gggggj^ 
dealers.  First,  it  must  have  an  attractive  ap-  of  good 
pearance,  or  it  will  often  pass  to  the  waste-  *pp®*'*°^®- 
basket  without  being  read.  The  chief  consideration  is  to 
have  the  little  magazine  read.  The  cover,  quality  of 
paper,  character  of  the  work  and  quality  of  the  pic- 
tures should  attract  and  arouse  interest.  Many  people 
judge  a  house  by  the  quaKty  and  style  of  its  printed 
matter.  A  poorly  printed  paper,  poor  quality  of  paper, 
unattractive  and  cheap  in  appearance,  lowers  the 
prestige  of  a  house,  and  is  not  only  injurious  to  business 
but  a  waste  of  money. 

The  subject-matter  should  be  carefully  selected,  well 
written  and  interesting.     Articles  on  subjects  related  to 
the  business,  telling  how  materials  are  pur-  Subject- 
chased,  made  or  shipped,  arouse  interest  in  JJ,^e'° 
the    average    reader.      The    articles    should  organs, 
give  information  and  facts  to  attract  and  hold  interest. 


290  ECONOMICS  OF  BUSINESS 

Sometimes  items  of  a  general  nature  may  be  used, 
but  care  should  be  exercised  in  not  making  their 
use  too  extensive.  Everything  should  be  written  in  a 
simple,  conversational  way,  and  should  be  so  simply  told 
as  to  be  understood  by  the  average  reader.  All  technical 
terms  should  be  avoided.  The  articles  should  be  liberally 
sprinkled  with  good  half-tone  pictures  relating  to  the 
Important  Contents  of  the  magazine.  It  is  not  advisable 
features.  ^q  burden  the  little  publication  with  direct  ad- 
vertising matter,  so  keep  the  publisher's  business  in  the 
background.  The  house  organ  to  dealers  should  keep 
them  posted  concerning  new  ideas  about  the  goods 
made  or  handled.  A  serious  mistake  is  often  found  in 
always  trying  to  sell.  On  the  other  hand,  the  dealer 
should  be  given  advice  and  suggestions  as  to  how  to  sell 
his  goods.  It  is  as  important  to  the  manufacturer  as  it 
is  to  the  dealer  to  remove  the  goods  from  the  shelves. 
Interesting  articles  by  well-known  men  on  management, 
Character-  salesmanship,  advertising  and  topics  of  general 
rea^^g  interest  to  dealers  arouse  interest,  and  insure 
matter.  the   reading  of   the  magazine.     Good  judg- 

ment should  be  exercised  in  selecting  a  mailing  list. 
House  organs  are  sent  to  regular  customers  as  well  as  to 
prospective  buyers.  They  should  not  be  scattered  broad- 
cast or  given  out  promiscuously.  The  house  organ 
offers  an  opportunity  to  present  in  interesting  form,  facts 
and  illustrations  which  educate  prospective  buyers  to  an 
imderstanding  of  the  goods  and  of  the  house.  A  good 
house  organ  is  an  important  factor  in  establishing  con- 
fidence and  getting  new  business.  It  is  a  new  factor  in 
advertising  and  its  use  is  being  daily  extended. 


MEDIUMS  OF  ADVERTISING  291 

A  new  demand  for  advertising  has  recently  developed 
as  the  result  of  the  increase  of  selling  by  mail.     The  mail- 
order business  has  proved  a  new  source  of  Mail-order 
profit  for  magazine  and  newspaper.     The  writ-  advertising, 
ing  of  advertisements  to  sell  goods  by  mail  tests  the  ability 
of  the   copy-writer.      Advertising   space  is  costly  and 
every  superfluous  word  means  so  much  loss.    A  copy- 
writer should  be  a  close  student  of  human  nature,  know 
thoroughly  the  class  of  people  to  whom  he  is  Buyer's 
to  make  an  appeal,  and  be  able  to  put  himself  viewpoint, 
in  their  position  and  see  the  advertisement  as  they  would 
see  it.     If  he  can  do  this,  it  will  assist  him  in  the  choice 
of  selling  points,  and  the  presentation  of  these  in  the 
most  attractive  manner.     If  an  advertiser  is  the  seller 
of  many  articles,  one  of  the  purposes  of  the  advertise- 
ment is  to  get  the  reader  sufficiently  interested  to  send 
for  a  catalogue.    A  new  article  should  be  specialized  in 
each  issue.     This  is  far  better  than  attempt-  ^ 

f^       Essentials 

Ing  to  crowd  many  articles  into  one  advertise-  of  adver- 
ment  as  nothing  is  so  bad  as  crowding  or  confu-  ^™^° ' 
sion  in  copy.  The  advertiser  should  pay  particular  atten- 
tion to  the  type,  and  see  that  it  is  of  sufficient  size  to  be 
easily  read.  One  of  the  chief  demands  of  a  copy- writer  in 
writing  copy  to  sell  goods  by  mail  is  that  he  be  a  master  of 
the  EngHsh  language.  It  requires  considerable  skill  and 
ability  to  express  the  selling  points  of  an  article  in  a  con- 
vincing manner.  The  essentials  of  a  good  mail-order  ad- 
vertisement are  the  cut,  the  price,  a  few  statements  about 
the  article,  a  few  arguments  why  a  person  should  buy  the 
article,  clear  readable  type,  no  crowding,  no  superfluous 
words,  the     name  and  address  of  the  advertiser  em- 


292  ECONOMICS  OF  BUSINESS 

phasized  by  having  more  prominent  t3^e,  and  every- 
thing told  in  simple,  clear  and  forceful  English.  The 
copy  should  bring  results,  directly  or  indirectly,  through 
selling  goods;  if  not,  the  advertisement  does  not  pay 
for  the  money  expended,  and  the  copy-writer  is  a 
failure. 

If  the  advertisement  arouses  interest  and  brings  an  in- 
quiry by  mail,  the  important  problem  is  to  convert 
FoUow-up  the  aroused  interest  into  desire  and  determi- 
system.  nation  to  buy  the  article.  The  following  up 
of  the  inquiry  or  the  follow-up  system  is  daily  receiving 
more  attention.  Many  advertisements  are  for  the 
purpose  of  obtaining  inquiries.  If  an  efifective  follow- 
up  system  is  in  operation,  many  inquiries  may  be  con- 
verted into  sales.    A  letter  should  open  the 

Importance.  i   .  ,    i  .         / 

way,  and  m  each  letter  some  prmted  matter 
should  be  inclosed.  Extreme  care  should  be  exercised 
in  the  selection  of  what  is  to  be  inclosed;  it  may 
be  either  a  folder,  circular  or  booklet.  The  inclosure 
should  carry  a  description  and  the  chief  selling  points 
of  the  article.  It  should  be  carefully  prepared  and  give 
specific  reasons  why  the  article  should  be  adopted  in 
^     .  preference  to  others.     If  no  answer,  it  is  not 

Require-  ^ 

mentsfor  advisable  to  send  more  than  three  letters, 
inc  osure.  ^^^j^  containing  a  different  inclosure.  All  in- 
closures  should  aim  at  presenting  in  a  clear,  logical 
manner  the  selling  points  of  the  article  and  not  more  than 
one  should  be  sent  at  a  time. 

The  letter  is  the  vital  part  of  the  follow-up  system.  It 
is  the  connecting  link  between  the  individual  and  the 
goods.     It  should  eliminate  all  business  talk  and  serve 


MEDIUMS   OF  ADVERTISING  295 

as  an  introduction.  The  main  purpose  is  to  put  the 
prospective  buyer  in  a  responsive  mood,  and  pave  the 
way  for  the  printed  matter.  The  letter  should  draw  at- 
tention to  the  inclosure.      Good   stationery  Require. 

should  be  used.    A  letter  on  cheap  stationery,  ments  of 

n     .  letter, 

gotten  out  m  a  slovenly  manner,  reflects  upon 

the  sender  and  has  little  value  in  getting  business.     The 

signature  should  not  be  typewritten,  but  signed  with  pen 

and  ink,  as  it  adds  to  the  sincerity  and  purpose  of  the 

letter.    Everything  should  be  done  to  make  the  letter 

personal  and  as  little  formal  as  possible.     The  sending 

of  a  letter  with  a  two-cent  stamp  arouses  curiosity,  as  to 

whether  or  not,  it  contains  something  of  importance,  and 

invariably  causes  it  to  be  read.     A  large  majority  of 

letters  are  sent  with  a  one-cent  stamp,  and  that  very  fact 

causes  a  great  many  to  be  cast  into  the  waste-basket 

without  as  much  as  a  glance. 

Booklets,  catalogues,  and  letters  without  magazine  or 
newspaper  advertising   are  sometimes   used  to  arouse 
interest,  but  the  usual  way  is  to  use  maga- 
zine  or  newspaper  or  both.     In  the  former  case,  obtaining 
lists  of  names  of  prospective  purchasers  are  "*^^**"®^- 
obtained  and  to  them  personal  letters  and  inclosures  are 
sent.    Letters  with  booklets  or  catalogues  are  used  alone 
and  to  advantage  in  selling  single  articles,  but  when  many 
are  offered  for  sale,  they  should  be  used  as  supplementary 
to  magazine  and  newspaper  advertising.     The  follow-up 
system  is  of  equal  importance  with  the  advertisement  in 
the  mail-order  business,  and  the  two  cannot  be  sepa- 
rated. 

Where  many  articles  are  offered  for  sale,  the  catalogue 


294  ECONOMICS  OF  BUSINESS 

is  a  necessary  prerequisite  of  the  mail-order  business. 
The  cata-  Where  only  one  or  two  articles  are  advertised, 
logue.  i-jjg  booklet  is  sometimes  semi-catalogue  in 

form.    The  old-fashioned   catalogue  was  usually  filled 
with  lists  of  conundrums,  popular  recipes,  meaning  of 
dreams,  and  generalities  about  goods  adver- 

Old  ionn» 

tised.  The  book  was  usually  cheap  in  ap- 
pearance, poorly  printed  and  unattractive.  The  increase 
in  the  mail-order  business  has  revolutionized  the  cata- 
logue. Many  mail-order  advertisements  have  for  their 
chief  purpose,  the  getting  of  the  catalogue  into  the  hands 
Prepara-  oi  buyers.  Mail-order  firms  frequently 
tion.  j.giy  upon  the  catalogue  not  only  to  interest 

but  to  sell  goods,  and  such  being  the  case,  too  great 
emphasis    cannot    be    placed    upon    its    preparation. 

It    should    not    be    cheap    in    appearance, 

Appearance.  ,  ,  . 

have  an  attractive  cover  and  contam  many 
illustrations  of  goods.  The  catalogue  should  interest, 
convince  and  sell  goods,  and  great  care  should  be 
taken  in  the  preparation  of  its  contents.  Technical 
terms  should  not  be  used  because  they  are  not  un- 
derstood by  the  average  reader  and  generalities  should 
in  every  instance  be  avoided.  Goods  should  be  ex- 
plained in  a  way  to  arouse  interest,  to  show  their 
superiority  over  others  and  why  they  should  be 
purchased.     Illustrations  should  be  well  executed  and 

show  the  goods  as  they  really  are.     People 

Contents.  ,  ^  ,  /  "^    ,        .  ^  , 

prefer  to  see  what  they  are  buying,  and 
if  they  are  not  able  to  do  so,  the  only  other  way  is 
to  see  an  illustration.  The  price  should  not  be  too 
much  in  the  foreground  because  it  will  be  found  no 


MEDIUMS  OF  ADVERTISING  295 

matter  where  it  is  placed.  The  catalogue  often  decides 
the  success  of  a  firm  yet  many  pay  little  attention  to  it. 
Colunms  of  figures,  numerous  dimensions  and  prices  are 
dry,  and  do  not  make  a  catalogue  attractive,  interesting 
or  convincing.  Facts  brought  out  in  a  clear,  concise  form 
are  what  arouse  interest  and  convince.  The  one  goal 
should  be  to  convince  the  reader  that  the  goods  adver- 
tised should  be  purchased  in  preference  to  others.  This 
should  be  borne  in  mind  because  it  is  the  chief  considera- 
tion in  selling.  The  catalogue  is  the  great  force  in  selling 
by  mail,  and  the  greatest  pains  should  be  taken  in  its 
preparation. 

A  medium  which  has  recently  increased  in  importance 
and  use  is  the  calendar.  Calendars  are  universally 
distributed  and  are  seen  everywhere.     For- 

11  -       -    .  1.1  Calendar. 

merly  they  were  confined  almost  exclusively  to 
the  insurance  business,  later  they  were  extended  to  rail- 
roads and  banks,  while  at  present,  they  are  used  by 
manufacturers,  jobbers  and  retailers.     They  are  generally 
used  to  advertise  a  firm  rather  than  a  product.     Calen- 
dars may  be  divided  into  two  classes,  olSice  and  home. 
The  mounting  of  an  office  calendar  should  be 
plain  and  simple,  without  pictures  or  illustra- 
tions,   and    with    the.  days    and    numbers  displayed 
in  large  t3^e  so  as  to  be  easily  seen  across  a 

"^  Essentials. 

large  room.    The  wording  should  be  hmited 
to  the  name  of  the  advertiser,  and  one  or  two  simple  for- 
cible statements  about  the  high  standard  of 
his  business  methods,  or  the  goods  made  or 
distributed.     The  calendar  for  home  use  is  of  a  different 
character.     The  mounting  is  more  or  less  artistic  and  fre- 


296  ECONOMICS  OF  BUSINESS 

quently  coloring  effects  are  used  to  advantage.  Many 
exaggerate  the  display  and  by  so  doing  decrease  the  value 
of  the  calendar  for  advertising.  It  should  always  be  born 
in  mind  that  the  chief  value  of  the  calendar  is  its  mission 

to  serve  as  such.  The  display  should  be  at- 
Essentials.  ,  .  i      i        i  it  .  /^ 

tractive  with  the  days  and  numbers  in  suffi- 
ciently large  type  to  be  read  at  a  distance.  Many 
calendars  lose  a  large  part  of  their  advertising  value  by 
having  the  calendar  in  small  type,  and  in  an  inconspicuous 
place.  Many  of  those  so  made  are  not  preserved,  and  at 
an  early  date,  find  their  way  to  the  waste-paper  basket. 
The  calendar  which  is  kept  and  serves  as  a  valuable 
advertising  medium  is  one  having  a  mounting  containing 
a  design  suitable  to  the  business  or  a  pleasing  one  of  a 
general  nature,  the  calendar  displayed  in  clear  prominent 
type,  the  address  of  the  advertiser,  and  one  or  two  simple 
statements  concerning  the  firm  advertised. 

The  blotter  is  used  in  various  shapes,  sizes  and  quan- 
tities for  advertising.     It  is  a  cheap  medium,  but  never- 
theless proper  judgment  should  be  given  to 
Blotter.  ,  .  Ill  1  • 

its  use.    The  advertiser  should  present  his 

blotter  in  a  form  that  will  be  used  and  not  discarded. 
Care  should  be  taken  in  the  use  of  colors,  as  flashy  colors 
detract,  and  decrease  the  value  of  the  medium.  A 
Require-  blotter  attached  to  a  good  quality  of  paper  and 
^nts  for  a  ^^^^  ^^  ^  blotter  on  one  side  gives  the  best 
blotter.  results.  A  neatly  and  artistically  designed 
cover,  consisting  of  a  picture,  the  name  and  address  of 
the  advertiser,  one  or  two  forcible  arguments  in  behalf 
of  the  firm  or  product  advertised,  and  attached  to  a  good 
quality  of  blotting  paper  gives  the  best  value  as  a  blotter. 


MEDIUMS   OF   ADVERTISING  297 

The  service  of  the  blotter  is  increased  by  having  the 
calendar  of  the  month  in  large,  clear  type.  Such 
blotters  should  be  distributed  at  the  end  of  each  month. 
Blotters  serve  only  as  a  supplementary  medium,  and  if 
properly  designed,  give  good  returns  for  the  money  ex- 
pended. 

Retail  merchants  find  handbills  a  valuable  advertising 
medium.  Price  and  value  are  the  important  factors 
to  be  considered.    Handbills  are  used  to  at-  „    ,,  .„ 

,,.,..       ,  HandbiUs. 

tract  people  to  stores,  and  their  chief  value  con- 
sists in  offering  such  attractions  as  induce  customers  to 
go  to  the  advertising  stores  to  buy.    The  chief  attrac- 
tion is  the  price.    A  few  articles  in  constant  _ . 

Pnce. 
demand  should  be  selected,  and  advertised  at 

a  sufficient  reduction  in  price  to  induce  people  to  come  to 
buy.  The  bargain  advertised  should  be  real  and  not  fake. 
The  average  American  buyer  has  a  good  idea  of  values, 
and  knows  when  an  advertisement  is  deceiving.  Many 
advertisers  lose  a  great  part  of  the  value  of  their  adver- 
tising by  trying  to  deceive  the  buying  public.  A  mer- 
chant should  remember  that  the  most  valuable  asset  of  his 
business  is  the  confidence  of  the  people  in  his  importance 
methods  and  in  his  goods.  He  should  be  care-  °^  ^^"®' 
ful  to  do  nothing  to  shake  this  confidence.  Advertising 
fake  values  is  more  costly  than  no  advertising.  The 
service  in  the  store,  and  the  value  given  should  be  such 
as  to  induce  a  new  customer  to  return  and  become  a 
regular  one.    This  is  the  great  value  of  adver-  „^  ,    , 

.    .  ,T  r  1  ^  ,  ,  Effects  of 

tismg.     How  often  have  we  heard  a  buyer  re-  advertising 
mark  on  reading  a  handbill,  "I  will  not  go  **^«^^"«s- 
because  before  he  advertised  fakes.''    Merchants  should 


298  ECONOMICS  OF  BUSINESS 

advertise  and  give  real  values,  and  handbill  advertising 
will  be  profitable.  Many  know  they  are  deceiving,  but 
make  the  mistake  of  thinking  others  do  not.  Merchants 
should  remember  that  every  fake,  or  deception  is  a 
boomerang  which  reboimds  with  double  force  on  the  ad- 
vertiser. 

The  giving  of  samples  is  one  of  the  oldest  methods  in 
advertising,  and  one  which  is  still  extensively  used.  Free- 
Free  sample  advertising  was  originally  confined  to 
samples.  ^-j^g  ^jj-^g  ^^^^  patent  medicine  business,  but  re- 
cently manufacturers  of  food  products  are  making  use  of 
it.  The  sample  should  be  well  packed  in  attractive 
covers  and  contain  sufficient  to  give  a  person  an  idea  of 
Essentials  the  quality  of  the  contents,  and  make  him  wish 
of^s^*^^  for  more.  Advertising  by  free  samples  is 
method.  limited  to  certain  products.  Interest  in  some 
articles  can  be  aroused  by  samples,  while  it  is  a  waste 
of  money  with  others.  The  advertiser  should  carefully 
study  his  product,  and  the  people  to  be  reached,  before 
deciding  upon  the  adoption  of  this  method  of  advertising. 
The  free-sample  method  should  not  be  used 

Risks.  . 

imless  the  article  is  adapted  to  its  use.  The 
great  risk  is  obtaining  honest  distribution.  Many 
manufacturers  send  out  their  own  employees,  and 
others  distribute  through  reliable  distributing  agencies. 
The  success  of  samples  depends  largely  upon  their 
method  of  distribution.  Those  given  away  promiscu- 
ously at  fairs,  or  upon  the  street,  do  not  have  the  value 
that  they  would  if  properly  distributed. 

Out-door  advertising  in  its  various  forms  occupies  a 
very  important  place  in  advertising.    Many  manufac- 


MEDIUMS   OF   ADVERTISING  299 

turers  and  jobbers  spend  yearly  large  sums  on  this 
kind  of  publicity.  It  makes  possible  the  reaching  of 
classes  of  people  which  other  mediums  do  not.   Necessity 

of  out-door 

Magazines  and  newspapers  are  read  by  the  advertising, 
educated  and  intelligent  classes,  but  many  in  this 
enHghtened  country  very  seldom  read  either.  Again, 
many  people  are  so  occupied  in  their  business  affairs, 
that  they  do  not  take  time  to  read  or  give  thought  to 
advertising  matter.  To  these  classes,  the  out-door  ad- 
vertiser displays  illustrations  or  short  sentences  along 
railroads,  country  highways,  or  city  streets  where  these 
people  pass. 

Out-door  advertising  can  be  divided  into  four  classes, — 
posters,  painted  signs,  electrical  displays  and  Kinds  of 
miscellaneous.  The  first  class  consists  of  dis-  advertising, 
plays  of  painted  bills  or  posters.  These  are  displayed 
on  buildings,  fences,  or  specially  constructed  stands. 
Illustrations  are  invariably  used  as  a  means  of  attracting 
attention.  Coloring  is  used  to  a  greater  extent  than  in 
any  other  medium  of  advertising,  as  frequently  many 
colors  are  used  in  an  illustration.     Posters  are  measured 

in  terms  of  the  unit  sheet,  twenty-eight  by 

.  .     ,  ,  .  \         ,  .  Posters. 

forty-two  mches  and  a  smgle  advertisement 

usually  varies  in  size  from  three  to  twenty-eight  of 
these  sheets.  The  prices  vary  with  the  kind  of  illus- 
tration used,  the  size  of  the  poster,  the  location  of 
the  stand,  and  the  quantity  ordered.  Recently  a  new 
development  of  bill-posting  has  come  into  prominence. 
The  billboard  is  illuminated  at  night  by  electricity,  and 
this  makes  the  advertisement  more  valuable  at  night 
than  during  the  day. 


300  ECONOMICS  OF  BUSINESS 

The  designing  of  a  poster,  and  the  writing  of  the  copy 
require  considerable  skill  and  decide  its  value  as  an  ad- 
Essentiais  vertising  medium.  The  illustration  should  be 
iK)st*er^a4-  Connected  with  the  goods  advertised  in  such  a 
vertisement.  way  as  to  familiarize  the  public  with  their  form 
as  offered  for  sale,  or  with  their  good  qualities.  People 
read  signs  while  passing,  and  consequently  the  whole 
message  should  be  read  at  a  glance.  Crowding  is  a 
serious  fault  in  a  copy.  People  fail  to  grasp  crowded 
copy  at  a  glance,  and  few  succeed  in  getting  the  message. 
Strong  arguments  in  favor  of  the  goods,  or  forcible  sug- 
gestions should  be  given  in  a  few  chosen  words.  To 
make  a  poster  simply  a  reminder  is  poor  advertising.  It 
should  emphasize  strong  selling  points  or  offer  forcible 
suggestions.  A  poster  should  be  well  printed,  have  a 
good  illustration  and  a  carefully  worded  copy. 

The  painted  sign  on  a  fence,  rock  or  the  side  of  a  build- 
ing has  long  been  familiar  in  most  civilized  coimtries,  but 
The  painted  only  within  recent  years  has  its  use  as  an  ad- 
sign,  vertising  medium  been  reduced  to  a  business 
basis.     Signs  may  be  divided  into  two  classes,  regu- 
lar and  chance.    The  regular  is  usually  painted  on  a  stand 
built  and  maintained  for  the  purpose.     Ex- 
amples may  be  seen  along  public  thorough- 
fares, and  the  streets  of  towns  and  cities.    The  chance 
sign  is  painted  on  fences,  rocks  or  buildings.     It  is  of  a 
more  temporary  nature  than  the  former,  as  the 
fence  or  building  may  be  taken  down,  de- 
stroyed, or  its  painted  area  hidden  by  the  erection  of 
buildings. 

The  same  skill  and  care  in  choosing  the  illustration,  and 


MEDIUMS   OF  ADVERTISING  301 

in  writing  the  copy  is  required  as  with  posters.    The 

price  is  based  upon  the  square  foot,  or  the  run-  Require- 

.       r  r  'lA  1  '  1      nients  of  a 

nmg  foot  of  space  occupied.    A  stand  or  a  side  sign. 

of  a  building  is  usually  charged  by  the  square  foot  and 
a  fence  by  the  running  foot.  The  price  varies  with 
location,  and  many  choice  locations  are  sold  Pnce  for 
to  the  highest  bidder.  The  price  for  fences  "^ns. 
around  buildings  or  vacant  lots  usually  runs  from  twenty- 
five  to  fifty  cents  per  running  foot  per  month.  This  price 
is  based  upon  yearly  contracts,  and  includes  the  original 
painting,  and  repainting  at  the  end  of  six  months.  The 
charge  for  town  and  city  stands  averages  about  five  dollars 
a  month  for  fifty  square  feet  with  an  increase  if  elaborate 
pictorial  illustrations  are  required.  Contracts  are  usu- 
ally made  for  a  year,  and  few  are  taken  for  less  than  six 
months. 

Electricity  has  been  an  important  factor  in  our  recent 
industrial  development,  and  its  influence  has  been  felt  in 
every  field  of  industrial  activity.     Its  use  in  jhe  electric 
advertising  has  been  so  increased  that  the  elec-  ^*^- 
trie  sign  is  recognized  as  an  important  medium  of  pub- 
licity.   Less  than  twenty  years  ago,  the  first  electric  sign 
made  its  appearance  on  Broadway,  and  within  its  recent 
these  two  decades,  electric  advertising  has  be-  srowth. 
come  an  established  business,  representing  an  invest- 
ment of  millions  of  dollars,  and  in  use  in  every  part  of  the 
civilized  world. 

The  sign  should  not  fail  to  attract  and  draw  attention 
to  the  article  advertised.  It  matters  not  how  attractive 
a  sign  may  be,  it  is  of  little  commercial  value  if  it 
does  not  rivet  the  observer's  attention  on  the  article. 


302  ECONOMICS  OF  BUSINESS 

The  Chariot  Race,  the  most  attractive  sign  on  Broadway, 
has  Uttle  commercial  value,  as  not  one  per  cent  of  the 
Essentials  people  who  See  it  notice  the  names  of  the 
attoactive  advertisers.  The  choice  of  an  illustration  for 
sign.  an  electric  sign  is  one  of   the  most  impor- 

tant tasks  in  advertising.  It  demands  the  skill  and 
abiUty  of  an  expert.  It  should  assist  the  copy  in 
riveting  attention  on  some  selling  point  of  the  article. 
The  commercial  value  of  every  electric  sign  depends  upon 
the  convincing  manner  in  which  the  selling  points  of  the 
article  are  forced  upon  the  observer.  Many  advertisers 
fail  to  reahze  this,  and  as  a  result,  a  great  part  of  the 
drawing  power  and  value  of  an  electric  sign  is  lost. 

The  wording  of  a  copy  demands  careful  study  and 

abiHty.    The  whole  sign  must  be  received  at  a  glance,  so 

the   copy  should  not  be  crowded  but  con- 

Essentials  -^  ^ 

for  a  good  sist  of  a  few  well-chosen  words.  The  words 
^^^'  should  tell  the  selHng  story  convincingly  and 

forcibly.  The  choice  depends  entirely  upon  the  article 
advertised.  No  one  set  of  words  can  be  used  for  two 
different  articles.  The  article  to  be  advertised  should 
be  carefully  studied,  its  strongest  selUng  points  discovered, 
and  a  few  words  chosen  to  forcibly  draw  the  attention 
of  the  observer  to  one  or  more  of  these.  An  electric 
sign  is  not  a  primary  source  of  advertising,  but  should  be 
used  as  an  auxiliary  to  magazine  and  newspaper.  It  is 
not  adapted  to  all  articles  but  only  to  those  in  constant 
demand  and  everyday  use.  Manufacturers  and  jobbers 
find  the  electric  sign  a  valuable  auxiliary  in  national 
advertising,  while  it  is  being  more  extensively  used  in 
retail  publicity. 


MEDIUMS   OF  ADVERTISING  303 

The  fourth  class  of  out-door  advertising  cannot  be 
easily  defined  as  it  is  limited  only  by  human  ingenuity. 
It  includes  the  use  of  advertising  vehicles,  j^jsj^guj^^g, 
motor  cars,  floats,  banners  and  persons.  This  ous  adver- 
class  occupies  quite  a  prominent  place  in  ^^^^' 
advertising.  Thousands  of  manufacturers,  jobbers  and 
retailers  use  one  or  another  of  these  novel  _.  ^ 

Kinds, 
methods  for  gaining  publicity. 

The  modern  street  car  has  proven  of  service  not  only 

for  carrying  passengers,  but  as  a  medium  for  advertising. 

A  large  percentage  of  the  population  of  a  town  j^^  street- 

or  city  rides  daily  in  the  street  cars.     Many  of  c"  as  a 

medium 

the  passengers  have  nothing  to  engage  their  foradver- 
attention  other  than  the  people  in  the  car.  *^®"^^* 
Advantage  was  taken  of  this  enforced  idleness,  and  from 
a  meager  beginning  a  few  years  ago,  street-car  advertising 
has  developed  into  a  well-organized  business,  bringing  in 
a  yearly  revenue  of  several  milHon  dollars. 

Street-car  signs  are  daily  read  by  people  of  every  class 
from  the  poorest  to  the  wealthiest.  They  reach  not 
only  consumers,  but  jobbers  and  retailers,  classes 
Street-car  signs,  in  serving  as  a  national  as  '®*^^®<^- 
well  as  a  local  advertising  medium,  place  manufacturers, 
jobbers  and  retailers  on  an  equal  footing.  Street-car  ad- 
vertising, however,  is  not  of  sufficient  force  to  stand 
alone,  but  should  be  used  supplementary  to  magazine  or 
newspaper.  It  is  not  adapted  to  all  classes  of  goods  and 
judgment  should  be  used  in  its  adoption.  The  article  to 
be  advertised  should  be  considered,  and  if  an  article  of 
popular  consumption  and  in  daily  demand,  the  street  car 
will  prove  a  valuable  supplementary  medium. 


304  ECONOMICS  OF  BUSINESS 

The  size  of  a  street-car  card  is  eleven  by  twenty-one 
inches,  and  this  gives  a  limited  space  for  advertising 
Requisites  matter.  The  first  consideration  is  to  attract 
advertise^  attention,  and  the  best  attraction  is  a  good 
ment.  illustration  of  the  article  or  one  of  its  uses. 

The  copy  should  not  be  crowded  nor  should  meaning- 
less words  be  used.  The  copy  should  consist  of  a 
few  well-chosen  words  giving  a  reason  why  the  article 
should  be  purchased,  or  offering  a  suggestion  why  the 
article  would  be  of  service  to  the  user.  No  more  than  one 
selling  point  should  be  used  in  a  single  copy.  The  copy 
should  be  changed  frequently,  the  illustration  remaining, 
but  a  different  selling  point  used  each  time.  If  the 
advertisement  is  for  local  publicity,  the  name  of 
the  advertiser  should  be  emphasized  by  being  placed  in 
larger  type.  The  copy  must  be  read  at  a  distance  so  it 
should  be  in  large  clear  type.  A  street-car  advertisement 
is  more  than  a  reminder.  It  should  carry  a  strong 
direct  appeal  to  purchase  the  article  advertised.  As 
much,  if  not  more  skill  is  required  in  writing  copy  for 
street-car  cards  as  for  magazine  advertising. 

Novelties    play    an    important    role    in    advertising. 
Everything  used  in  advertising  outside  of  that  prepared 
by  a  printing  press  may  be  classed  under  the 
term  advertising  novelties.  Advertising  novel- 
ties comprise  everything  of  a  manufactured  nature,  such 
as  clocks,  penholders,  pencils,  paper  weights,  inkstands, 
rulers,  articles  of  paper,  wood   pulp,  bone, 
in  novelty      wood,  tin,  copper  and  brass.    A  novelty  may 
advertising.    ^^  ^^^^lev  something  of  practical  use  to  the 
prospective  customer  or  of  value  as  an  ornament.    It  is 


MEDIUMS   OF  ADVERTISING  305 

absurd  to  have  for  an  advertising  novelty  an  article  of 
no  use  to  the  receiver.  It  should  have  a  use  or  it  will 
not  be  preserved.  The  name  of  the  advertising  firm 
should  be  distinct  and  plain,  but  not  too  conspicuous. 
A  novelty  which  is  so  covered  with  advertising  as  to  be 
of  no  practical  use  to  the  receiver  is  worse  than  none. 
A  novelty  should  have  sufficient  interest  or  usefulness  to 
be  attractive.  Novelties  should  not  be  given  away  pro- 
miscuously but  should  be  distributed  with  judgment. 
They  may  be  of  considerable  value  as  an  advertising 
medium,  or  represent  a  loss.  Everything  depends  upon 
the  judgment  of  the  advertiser  in  the  choice  of  the 
article,  its  attraction  or  usefulness,  and  its  method  of  dis- 
tribution. 

QUESTIONS 

1.  What  is  a  medium?  Name  the  different  varieties. 
What  are  the  essentials  in  the  choice  of  a  medium  ? 

2.  When  are  magazines  to  be  used  in  advertising  ?  What 
are  the  characteristics  of  magazine  advertising  ? 

3.  What  is  the  function  of  the  newspaper  in  advertising? 
What  are  the  fundamentals  of  newspaper  advertising  ? 

4.  Why  is  the  field  of  the  trade  journal  limited  in  adver- 
tising ? 

5.  Why  is  good  appearance  important  in  a  booklet? 
What  are  the  essentials  in  writing  a  booklet  ? 

6.  What  is  the  purpose  of  a  house  organ  ?  Name  the  differ- 
ent kinds,  and  give  the  essentials  of  each.  What  are  the 
essentials  of  text-matter  for  a  house  organ  ? 

7.  What  are  the  essentials  for  advertising  to  sell  by  mail  ? 
Why  is  it  necessary  for  a  copy-writer  to  be  a  student  of  human 
nature  ? 

8.  What  is  the  purpose  of  the  follow-up  system?  Why 
should  the  inclosure  receive  careful  attention  ? 


3o6  ECONOMICS  OF  BUSINESS 

9.  What  are  the  chief  requirements  for  a  letter  ?    Why 
is  the  letter  an  important  factor  in  advertising  ? 

10.  What  is  the  function  of  the  catalogue  in  advertising? 
What  are  the  fundamentals  for  a  catalogue  ? 

11.  When  may  calendars  and  blotters  be  advantageously 
used  in  advertising?  What  are  the  requirements  for  a 
calendar  ?    What  for  a  blotter  ? 

12.  What  are  the  chief  factors  in  handbill  advertising? 
What  is  free  sample  advertising  ? 

13.  Account  for  the  growing  importance  of  poster  adver- 
tising.   Name  varieties  and  give  characteristics  of  each. 

14.  What  are  the  essentials  for  an  effective  electric  sign  ? 
What  goods  may  be  advertised  in  this  way  ? 

15.  What  are  the  advantages  of  street-car  advertising? 
What  are  the  requisites  for  a  good  car  sign  ? 

REFERENCES 

T.  A.  De  Weese,  "The  Principles  of  Practical  PubHcity"; 
H.  N.  Casson,  "Ads  and  Sales";  G.  H.  Powell,  "Powell's 
Practical  Advertiser";  G.  H.  E.  Hawkins,  "Poster  Adver- 
tising"; Calkins  and  Holden,  "Modern  Advertising";  H. 
Bridgewater,  "Advertising, "  Chs.  X,XIII ;  T.  D. MacGregor, 
"Pushing  your  Business,"  Chs.  II,  III,  XI;  S.  Grayden, 
"  Some  Notes  on  Catalog  Making" ;  System  Company,  "How 
to  Write  Letters  that  Win";  C.  Moran,  "The  Business  of 
Advertising,"  Chs.  Ill,  V,  VI;  N.  C.  Fowler,  "Building 
Business,"  Chs.  X-XLIII;  "Business  Administration," edited 
by  W.  D.  Moody,  Vol.  Ill ;  F.  Bellamy,  "Effective  Magazine 
Advertising" ;  H.  Bunting,  "Specialty  Advertising" ;  F.  Far- 
rington,  "Retail  Advertising";  E.  T.  Page,  "Advertising"; 
E.  Balmer,  "The  Science  of  Advertising";  P.  T.  Chering- 
ton,  "  Advertising  as  a  Business  Force,"  Ch.  IV  ;  J.  A.  Mac- 
Donald,  "  Successful  Advertising  ;  How  to  Accomplish  it." 


CHAPTER  XIV 

MONEY  AND   CREDIT 

Exchangeability  is  one  of  the  most  important  essen- 
tials of  our  industrial  system.  Its  early  form,  or  the 
trading  of  one  article  for  another,  is  known  Evolution 
as  barter,  and  is  found  among  all  primitive  o^  money, 
people.  The  barter  system,  in  the  earHest  stages  of  civi- 
lization, caused  great  inconvenience  to  primitive  people. 
If  a  native  had  a  spear  to  dispose  of,  he  had  to  wait 
until  he  met  another  who  wanted  a  spear,  and  at  the  same 
time,  had  a  hatchet  to  give  which  he  wanted.  Should  the 
spear  and  hatchet  come  together,  exchange  or  barter 
might  be  prevented  because  one  of  the  natives  thought 
his  article  worth  more  than  the  other.  The  inconven- 
iencies  connected  with  barter  soon  led  to  the  selection 
of  an  article  acceptable  to  the  people,  and  freely  receivable 
in  exchange  for  all  articles.  This  article  chosen  to  serve 
as  the  medium  of  exchange  is  called  money,  no  matter 
what  its  material  or  form. 

The  commodity  chosen  to  serve  as  money  during  the 
early  days  of  economic  development,  was  usually  one 
of  general  demand.     It  is  claimed  that  the  i^^tenais 
earHest  money  consisted  of  articles  used  for  used  as 
personal   adornment.     Shells,  beads,   beaver  ™°°®y* 
skins,  dried  fish,  cattle,  tea,  salt,  cocoanuts,  slug  shots,  corn 
and  wheat  are  a  few  of  the  articles  which  have  been  at  dif- 

307 


3o8  ECONOMICS  OF  BUSINESS 

ferent  times  and  in  different  places  used  as  money.  Metals 
were  gradually  introduced,  and  they  soon  took  the  place 
of  other  commodities.  As  communities  progressed,  and 
exchanges  increased,  the  base  metals,  lead,  tin,  iron, 
copper  and  bronze,  were  supplanted  by  silver  and  gold. 
Gold  is  the  best  adapted  of  all  metals  to  serve  as  a 
medium  of  exchange,  and  this  explains  its  universal 
adoption  as  money. 

Money  performs  several  functions  in  industrial  society. 
The  first  and  earliest  function  to  develop  was  to  serve  as 
Functions  a  medium  of  exchange.  With  the  develop- 
of  money,  ment  of  this  function,  other  articles  began  to 
be  measured  in  terms  of  the  medium,  and  this  gave 
Medium  of  US  the  second  function,  namely,  to  serve  as  a 
exchange,  standard  of  value.  The  beginning  of  the 
practice  of  hoarding  precious  metals  introduced  a  third 
function,  a  store  of  value.  People  when  they  hoarded 
standard  of  their  wealth  wanted  some  assurance  that  when 
value.  ijjey  wished  it,  its  value  would  not  be  materi- 

ally changed.  Money  to-day  is  not  as  a  rule  kept  by 
the  average  man  long  enough  to  make  its  function  as 
store  of  2,  store  of  value  very  important.  Neverthe- 
^"®*  less  in  business,  a  great  deal  depends  upon 

faith  in  the  safety  of  the  value  stored  in  gold,  and  this 
is  the  quality  which  gives  gold  its  strength  as  a  reserve 
fund  to  sustain  credit  instruments  and  credit  currency, 
standard  When  the  ownership  of  property  became  more 
f erred"  secure,  loaning  took  the  place  of  hoarding,  and 

payments,  the  Contracting  of  debts  introduced  the  ques- 
tion of  the  value  of  the  money  in  which  debts  were  in 
the  futiire  to  be  paid.    Debts  may  be  made  payable 


MONEY  AND   CREDIT  309 

in  any  commodity  but  they  are  usually  payable  in  money 
which  becomes  the  standard  for  deferred  payments. 
Credit  did  not  assume  any  importance  until  money  had 
acquired  the  four  preceding  functions.  The  develop- 
ment of  credit  increased  the  importance  of  the  store  of 
value  function,  and  at  the  same  time,  introduced  the  fifth 
and  last  function,  to  serve  as  a  reserve  for   .  ^    .  , 

A  basis  for 

credit   operations.     The   amount   of   money  credit 
necessary  to  maintain  credit  varies  in  dijBferent  °p®^***<*°s- 
countries,  and  in  the  same  country  at  different  times, 
but  it  should  be  sufficient  to  maintain  confidence,  which 
is  the  basis  of  credit  transactions. 

Many  years  elapsed  between  the  first  use  of  metals  as 
money  and  the  introduction  of  coinage.     Coinage  is  the 
stamping  of  a  piece  of  metal  for  use  as  money 
so  as  to  make  known  its  denomination,  value,     ^"^  ** 
weight  and  fineness.     Gold  and  silver  are  too  soft  in  their 
pure  state  to  stand  the  wear  of  ordinary  usage.     In  order 
to  make  the  coins  more  durable,   the  pure  standard 
metal  is  hardened  by  being  mixed  with  copper.  ™®*^* 
The  hardened  metal  is  called  standard  to  distinguish 
it  from  pure  metal.     The  practice  in  the  United  States 
and  in   many  foreign   countries  is  to  use  nine  parts 
pure    metal    to    one    part    copper    alloy,    and    coins 
made  from  this  compound  are  said  to  be  nine  tenths 
fine.     The    value    of    alloy    in    this    country    is    not 
coimted  in  the  value  of  the  coins,  so  the  amoimt  of  pure 
metal  is  the  only  truth  of  importance  to  be  associated 
with  a  coin,  as  for  instance,  the  ten-dollar  gold  piece 
should  be  known  as  containing  232.2  grains  of  pure  and 
not  258  grains  of  standard  gold. 


3IO  ECONOMICS  OF  BUSINESS 

Free  coinage  implies  a  right  to  take  metal  to  the 
mint  in  unlimited  quantities  and  have  it  converted  into 
coins.  The  government  frequently  restricts  to  itself 
the  right  of  coinage.  It  buys  pure  metal,  converts 
Free  and  ^^  ^^^^  coins,  and  does  not  allow  the  people  to 
restricted  exchange  the  metal  at  the  mint  for  coins.  In 
the  United  States,  there  is  free  coinage  of  gold, 
but  the  government  restricts  to  itself  the  coinage  of  all 
other  coins. 

Standard  money  is  money  of  which  the  value  depends 
upon  the  value  of  the  material  contained,  the  stamp 
serving  merely  as  a  guarantee  of  the  quantity  of  pure 
metal.  Such  coins  are  received  everywhere,  because 
Standard  they  contain  their  face  value  in  the  pure  metal 
s^^y^"  of  which  they  are  made.  Gold  coins  are  the 
coins.  only  examples  of  standard  money  in  our  country. 

Token  or  subsidiary  money  consists  of  coins  whose  bullion 
value  is  less  than  their  face.  All  coins  except  gold  in 
the  United  States  are  subsidiary.  Current  subsidiary 
coins  may  be  divided  into  three  classes :  the  silver  dollar ; 
subsidiary  silver  consisting  of  dimes,  quarters,  and  half 
dollars ;  and  minor  coins  consisting  of  cents  and  nickels. 

The  redemption  of  subsidiary  coins  in  standard 
money  is  one  of  the  chief  ways  of  adjusting  the  amount 
„  J      ^       coined  to  the  actual  needs  of  the  people.     The 

Redemption  '^      ^ 

of  sUver  only  way  to  adjust  the  supply  to  the  demand  is 
to  allow  all  who  wish  subsidiary  coins  to  obtain 
them  in  exchange  for  lawful  money,  and  to  be  given 
lawful  money  whenever  they  present  them  in  suitable 
sums  for  redemption.  The  Treasurer  of  the  United 
States  redeems  in  lawful  money  on  demand,  all  subsidiary 


MONEY  AND   CREDIT  311 

coins  except  silver  dollars  when  presented  in  sums  of 
twenty  dollars  or  any  multiple  thereof. 

The  silver  dollar  is  not  kept  at  a  parity  with  gold  by 
means  of  the  existing  system  of  redemption.  There  is  no 
law  requiring  the  Treasurer,  in  express  terms,  The  sUver 
to  redeem  silver  dollars  in  gold.  Several  at-  ^**^*^- 
tempts  have  been  made  to  obtain  such  a  law,  but  the  silver 
followers  have  always  been  strong  enough  to  defeat  it. 
The  method  of  removing  an  oversupply  of  silver  dollars 
from  circulation  may  be  called  indirect  redemption.  The 
Treasury  in  all  payments  to  itself  receives  silver  dollars 
on  an  equality  with  gold,  and  in  making  payments  does 
not  give  silver  dollars  to  any  one  not  wishing  them. 
As  long  as  the  Treasury  receives  silver  dollars  on  an 
equahty  with  gold,  and  pays  out  only  gold,  there  is  a 
complete  system  of  redemption  although  it  is  indirect. 
The  Treasury  is  duty-bound  and  forced  by  statute  to 
maintain  the  silver  dollar  at  a  parity  with  gold.  The 
indirect  system  is  not  perfect,  and  the  only  way  of  ward- 
ing off  emergencies  which  might  destroy  it,  is  to  pass  a 
law  providing  for  the  redemption  of  silver  dollars  in 
gold. 

When  individuals  are  allowed  to  take  gold  or  silver 
bullion  to  the  mint  and  have  it  coined  without  charge, 
coinage    is    gratuitous.     The    expenses    in-  charges  for 
volved  are  charged  upon  the  nation  in  the  coinage, 
same  way  as  ordinary  pubHc  expenditures.     The  govern- 
ment sometimes  asks  a  fee  just  sufficient  to  cover  the 
expense  of  coinage,  and  sometimes  makes  a 
charge  so  that  a  profit  remains  after  paying 
the  mintage  charges.    The  former  method  is  known  as 


312  ECONOMICS  OF  BUSINESS 

brassage,  and  the  latter  as  seigniorage.  In  this  country, 
Brassage.  the  term  seigniorage  is  used  to  designate  the 
Seigniorage,  profits  obtained  by  the  government  from  the 
coining  of  subsidiary  and  minor  coins.  This  profit,  which 
has  in  recent  years  amounted  to  many  milHon  dollars, 
would  disappear  if  the  government  were  called  upon 
to  redeem  these  coins  in  gold.  Actual  profits  result  only 
with  coins  put  in  circulation  and  later  lost  or  destroyed, 
so  that  they  are  not  presented  for  redemption. 

The  Constitution  gives  to  Congress  the  sole  right  to 
coin  money  and  to  regulate  its  value.  It  forbids  the 
Right  to  states  to  coin  money  or  make  anything 
coin  money,  except  gold  or  silver  coin  legal  tender  in  pay- 
ment of  debts.  Our  present  coinage  system  was  in- 
troduced by  the  Mint  Act  of  1792.  This  act  author- 
ized the  establishment  of  the  mint  and  the  use  of  the 
decimal  system  in  the  keeping  of  accounts.  The  chief 
gold  piece  was  the  eagle  weighing  247.5  grains 
pure  and  270  standard.  Half  and  quarter 
eagles  containing  proportionate  amounts  of  gold  were  also 
provided  for.  The  fineness  of  metal  in  the  coins  was 
copied  after  that  of  England,  and  made  eleven  twelfths. 
The  mint  in  1795  coined  a  number  of  half  eagles,  the 
first  gold  coined  under  the  Constitution.  The  fineness 
in  1837  was  changed  to  nine  tenths,  and  at  the  same 
time,  a  change  was  made  in  the  weights  of  the  coins. 
The  eagles  were  changed  to  232.2  grains  pure  metal  and 
258  standard,  while  the  half  and  quarter  eagles  were 
changed  proportionately.  The  double  eagle  and  gold 
dollar  were  introduced  in  1849,  ^^^  the  three-dollar 
piece  four    years  later.     The  coinage  of  the  last  two 


MONEY  AND   CREDIT  313 

coins  was  suspended  by  an  act  in  1890.  Gold  coins  are 
accepted,  at  their  face  value,  the  world  over,  and  as 
a  result,  more  than  half  the  gold  minted  in  the  United 
State  is  held  in  foreign  countries. 

During  the  early  part  of  the  sixteenth  century,  a 
lucrative  trade  was  carried  on  between  many  of  the 
colonies  and  the  West  Indies.  Many  Spanish  coins 
foimd  their  way  into  the  colonies,  and  soon  became 
the  current  coins  in  circulation.  The  best  known  of 
these  was  the  Spanish  dollar,  and  many  suver 
colonies  passed  laws  regulating  its  legal  doUars. 
tender  powers.  The  original  American  silver  dollar,  as 
provided  by  the  Act  of  1792,  was  modeled  after  the 
Spanish  dollar,  and  weighed  371.25  grains  of  pure  and  416 
of  standard  silver.  The  standard  weight  of  the  dollar 
was  changed  in  1837  to  412.5  grains  but  the  amount  of 
pure  silver  was  left  unchanged.  This  change  fixed  the 
fineness  at  nine  tenths,  and  both  weight  and  fineness  are 
the  same  to-day. 

From  1837  to  the  passage  of  the  coinage  act  in  1873, 
371.25  grains  of  pure  silver  were  worth  more  as  bullion 
than  coined  into  silver  dollars,  and  as  a  result,  few  dollars 
were  coined,  and  practically  none  found  their  way  into  cir- 
culation.    The  government  did  not  think  it  ^   .   .      , 

*=*  Omission  of 

necessary  to  have  the  silver  dollar  among  the  sUver 
authorized  coins  of  the  country,  and  in  the    °  "^' 
Mint  Act  of  1873  which  revised  the  list  of  coins,  it  was 
omitted.     The  same  act,  in  order  to  assist  the  American 
trade  in  the  East,  authorized  the  minting  of  a  Trade 
silver   dollar   weighing   420   grains  standard  ^°"^* 
and  378  pure  silver.    By  accident,  the  new  silver  dollar,  or 


314  ECONOMICS  OF  BUSINESS 

trade  dollar  as  it  was  called,  was  given  the  same  legal 
tender  power  as  subsidiary  silver  coins  and  soon  confusion 
arose.  The  coinage  of  these  dollars  was  discontinued  in 
1878,  and  in  1887  an  act  was  passed  authorizing  the 
Treasurer  to  redeem  in  silver  dollars  or  subsidiary  coin  all 
presented  within  a  period  of  six  months.  Those  not 
redeemed  are  only  worth  the  value  of  the  pure  silver 
which  they  contain. 

Soon  after  the  passage  of  the  act  of  1873,  silver  became 
cheaper.  The  following  year  the  silver  bullion  in  the  stand- 
ard dollar  could  be  purchased  for  98.8  cents,  and  in  1876 
for  89.4  cents.  The  friends  of  silver  started  a  movement 
for  the  restoration  of  the  old  silver  dollar,  and  in  1878 
were  successful  in  obtaining  the  passage  of  the  Bland- 
Bland-  AlHson  Act.  This  act  restored  the  minting 
Allison  Act.  of  the  old  Standard  dollar  but  Hmited  its 
coinage  to  the  government.  The  government  was  au- 
thorized to  purchase  not  less  than  two  milHon  dollars'  nor 
more  than  four  million  dollars'  worth  of  silver  monthly 
and  to  coin  the  same  into  standard  silver  dollars  as 
authorized  by  the  Act  of  1837.  The  Bland- Allison 
Act  remained  in  force  until  1890,  and  during  that  time 
378,166,793  silver  dollars  were  coined.  The  friends 
of  silver  obtained  further  concessions  under  the  Sherman 
Sherman  Act  in  1890,  when  the  Treasurer  was  com- 
^***  pelled  to  purchase  four  and  a  half  million 
ounces  of  silver  a  month,  and  to  issue  Treasury  notes  in 
payment  for  the  same.  The  silver  purchased  was  to 
be  minted  into  standard  silver  dollars  at  the  rate  of  not 
more  than  two  million  ounces  monthly  until  June  i,  1891, 
and  after  that  date,  the  minting  should  be  limited  to 


MONEY  AND   CREDIT  31^ 

the  amount  needed  to  redeem  the  Treasury  notes  issued 
under  the  act.  The  Sherman  Act  was  repealed  in  1893, 
but  silver  dollars  continued  to  be  minted  in 
small  quantities  until  the  end  of  1904,  and 
none  have  since  been  minted.  The  mint  has  coined 
578,353,848  silver  dollars,  and  of  this  amount,  nearly 
90  per  cent  is  at  present  stored  in  the  Treasury  vaults  at 
Washington. 

The  Mint  Act  of  1792  authorized  the  issue  of  silver 
half  dollars,  quarters,  dimes  and  half  dimes,  propor- 
tionate in  weight  to  the  silver  dollar.  The  Act  subsidiary 
of  1837  reduced  their  weights  in  proportion  to  ®*^^®'  ^^^^' 
the  new  standard  weight  of  the  silver  dollar,  and  made 
their  fineness  nine  tenths.  The  first  important  change 
was  made  by  the  Act  of  1853.  The  high  price  of  silver 
as  compared  with  gold  made  the  silver  in  the  coins 
worth  more  as  bullion  than  coined.  The  result  was 
that  the  silver  coins  were  taken  from  circulation  either 
for  melting  purposes  or  for  export  to  foreign  coun- 
tries, where  they  were  sold  at  their  bullion  value.  The 
coins  disappeared  from  circulation,  and  in  order  to 
cause  their  return  the  Mint  Act  of  1853  reduced  by  nearly 
7  per  cent  the  weight  of  silver  in  the  silver  coins  less 
than  one  dollar.  This  would  make  it  unprofitable  to 
melt  or  export  the  coins,  and  it  was  thought  that  they 
would  return  to  circulation.  A  three-cent  silver  piece 
was  provided  by  an  act  of  185 1,  and  it  and  the  five-cent 
piece  were  discontinued  by  the  Act  of  1873.  In  1875, 
a  twenty-cent  piece  was  authorized  but  its  coinage 
was  discontinued  three  years  later.  The  half  dollar, 
quarter  and  dime  are  minted  in  sufiicient  quantities 


3i6  ECONOMICS  OF  BUSINESS 

to  meet  the  demands  of  business,  and  the  amount  of  each 
annually  coined  is  decided  by  the  Treasury  Department. 

A  copper  cent  and  half  cent  were  authorized  in  1792. 
An  act  in  1857  discontinued  the  latter,  and  provided  that 
the  former  should  be  reduced  in  size,  and  in  future  be 
Cents  and  made  out  of  a  compound  of  copper  and 
nickels.  nickel.  The  three-cent  nickel  piece  was  au- 
thorized in  1863,  and  our  present  nickel  in  1866. 
An  act  in  1864,  introduced  our  present  cent  piece  and 
also  a  two-cent  piece  of  the  same  metal.'  The  Mint  Act 
of  1873  discontinued  the  two-cent  and  that  of  1890  the 
three-cent  nickel  piece.  Minor  coins  are  furnished  free 
of  transportation  charge  from  the  Mint  at  Philadelphia 
and  are  obtainable  in  exchange  at  any  subtreasury. 

In  order  to  raise  funds  to  carry  on  the  Civil  War,  the 
government  in  February,  1862,  passed  an  act  authoriz- 
United  ing  the  Secretary  of  the  Treasury  to  issue 

or*ir*een-*^^  $150,000,000  in  treasury  notes  on  the  credit  of 
backs.  the  United  States,  not  bearing  interest  and 

payable  to  bearer.  In  the  following  June,  another  issue 
of  the  same  amount  was  authorized  and  in  January,  1863, 
$100,000,000  more,  bringing  the  total  to  $400,000,000. 
In  June,  1864,  Congress  authorized  a  temporary  issue  of 
$50,000,000,  and  as  soon  as  these  notes  were  canceled, 
the  maximum  circulation  should  be  fixed  at  $400,000,000. 

United  States  notes  or  greenbacks,  as  they  were  later 
called,  soon  won  many  friends.  After  the  war,  when  the 
question  of  their  redemption  arose,  there  was 
tionof  much  opposition.     Nevertheless  in  1866,  an 

greenbacks.  ^^^  ^^^  passed  authorizing  cancellation  to  the 
amount  of  $10,000,000  for  the  first  six  months,  and  not 


MONEY  AND   CREDIT  317 

more  than  $4,000,000  a  month  thereafter.  The  friends 
of  greenbacks  eventually  won,  and  the  act  was  repealed 
in  1868,  but  during  its  enforcement,  $44,000,000  were 
canceled,  which  reduced  the  maximum  to  $356,000,000. 
The  Secretary  of  the  Treasury,  to  reUeve  the  panic  of 

1873,  issued  $26,000,000  of  the  $44,000,000  which  had 
been  previously  canceled.     This  increase  was  legalized 

^  by  special  act  of  Congress  the  following  year,  and  brought 
the  maximum  to  $382,000,000. 

Many  believed  that  the  time   had  arrived   for  the 
redemption  of  greenbacks  with  gold,  and  in  December, 

1874,  a  measure  later  known  as  the  Redemp-  Redemption 
tion  Act  passed  the  Senate,  was  agreed  to  by  baSsln" 
the  House,  and  became  a  law  on  January  14,  gold- 

1875,  It  authorized  the  redemption  of  greenbacks  in 
coin  on  and  after  the  first  of  January,  1879,  when  pre- 
sented at  the  Assistant  Treasurer's  office  in  New  York, 
in  sums  of  not  less  than  fifty  dollars.  The  Secretary  of 
the  Treasury,  in  order  to  raise  the  necessary  funds,  was 
authorized  to  use  any  surplus  in  the  Treasury  not 
otherwise  appropriated,  and  to  issue  and  sell  for  coin  at 
not  less  than  par.  United  States  bonds.  Certain  re- 
strictions were  removed  from  the  issue  of  national  bank 
notes  and  in  order  to  prevent  inflation  of  paper  currency, 
the  Secretary  of  the  Treasury  was  authorized  by  the 
act  to  cancel  United  States  notes  to  a  sum  not  exceeding 
80  per  cent  of  the  increased  bank-note  issue  and  at  the 
same  time  not  to  exceed  $82,000,000.  Cancellation 
slowly  proceeded  until  an  act  was  passed  May  31,  1878, 
which  forbade  the  further  cancellation  of  greenbacks, 
and  at  the  same  time,  authorized  the  reissue  of   any 


3i8  ECONOMICS  OF  BUSINESS 

redeemed.  When  the  act  went  into  force,  the  amount 
in  circulation  was  $346,681,016  and  this  arbitrary 
sum  is  to-day  the  maximum  Umitation  on  the  issue  of 
greenbacks.  Since  the  first  of  January,  1879,  the  govern- 
ment has  redeemed  in  gold  all  greenbacks  presented  for 
redemption.  The  Currency  Act  of  igcx)  provided  a 
reserve  of  $i5o,ooo,cxx)  in  gold  coin  and  bulHon  for  the 
sole  purpose  of  redeeming  legal  tender  notes  on  demand 
in  gold. 

A  gold  certificate  is  a  warehouse  receipt  for  gold  coin  or 
bullion  on  deposit  at  the  United  States  Treasury  at  Wash- 
Gold  certifi-  ington.  Gold  certificates  were  authorized  in 
cates.  j352  but  the  first  were  not  issued  until  two 

years  later.  The  smallest  denomination  is  ten  dollars 
and  the  largest  ten  thousand.  Gold  certificates  are  a 
favorite  currency  with  the  people,  as  is  shown  by  the 
fact  that  nearly  $950,000,000  are  in  circulation. 

The  silver  certificate  is  a  warehouse  receipt  issued 
by  the  government  for  silver  dollars  on  deposit  in  the 
SUver  cer-  Treasury  vaults  at  Washington.  They  were 
tificates.  authorized  by  the  Bland-Allison  Act.  The 
lowest  denomination  at  first  was  ten  dollars,  but  in  1886 
one-,  two-,  and  five-dollar  certificates  were  authorized. 
During  recent  years,  it  has  been  the  policy  of  the  govern- 
ment to  confine  all  currency  under  five  dollars  to  silver 
certificates. 

The  Secretary  of  the  Treasury  was  authorized  to 
issue  treasury  notes  of  not  less  than  one  dollar  or  more 
Treasury  ^^^^  ^^^  thousand  dollars  to  pay  for  the 
notes.  silver  bullion  purchased  under  the  Sherman 

Act  of   1890.     These  notes  were  redeemable  in  coin, 


MONEY   AND    CREDIT  319 

and  could  be  reissued.  As  the  silver  bullion  was  coined 
into  silver  dollars,  the  treasury  notes  were  canceled, 
the  silver  dollars  placed  in  the  Treasury,  and  silver 
certiiBicates  issued  in  their  stead.  Nearly  $156,000,000 
of  these  notes  were  issued  but  all  have  been  redeemed 
and  canceled  except  between  two  and  three  millions,  so 
they  are  at  present  rarely  seen  in  circulation. 

In  the  United  States,  bank  note  circulation  is  confined 
to  national  banks.  State  banks  are  not  prohibited  from 
issuing  notes  but  do  not  do  so,  on  account  of  a  Bank 
prohibitory  tax  of  10  per  cent,  authorized  in  *^°*®^- 
1865  and  levied  on  all  notes  used  for  circulation  as  money 
except  those  of  national  banks.  National  banks  are  com- 
pelled by  law  to  keep  on  deposit  with  the  United  States 
Treasury  at  Washington,  United  States  bonds,  dollar 
for  dollar,  for  all  bank  notes  issued,  and  are  not  allowed 
to  issue  an  amount  greater  than  their  paid-up  capital. 
The  ordinary  denominations  in  circulation  are  five,  ten, 
twenty,  fifty,  and  one  hundred.  Denominations  of 
one  and  two  were  issued  imtil  the  redemption  of  green- 
backs in  gold,  and  five-hundred  and  thousand-dollar 
notes  are  authorized,  but  none  of  the  former  and  only  a 
few  of  the  latter  are  in  circulation.  Only  one  third 
of  the  notes  issued  by  any  bank  can  be  of  the  denomina- 
tion of  five  dollars.  Each  bank  must  redeem  its  own 
notes  on  demand,  not  only  over  its  own  coimter  but  also 
at  the  Treasury  Department  in  Washington.  To  provide 
for  redemption  at  Washington,  each  must  keep  on  deposit 
at  the  Treasury  in  lawful  money  a  sum  equal  to  5  per 
cent  of  its  circulation,  to  be  held  for  the  redemption  of 
bank  notes,  when  presented  in  sums  of  one  thousand 


320  ECONOMICS  OF  BUSINESS 

dollars  or  any  multiple  thereof.  Bank  notes  are  printed 
by  the  government  at  the  expense  of  the  banks.  De- 
faced or  mutilated  notes  received  at  the  Treasury  are 
replaced  by  new  ones  at  the  expense  of  issuing  banks. 

Legal  tender  is  money  which  a  creditor  must  accept 
in  payment  of  debt.  Gold  is  the  only  money  in  the 
Legti  United  States  which  possesses  full  unlimited 

tender.         jggg^j  tender  power.     Silver  dollars  possessed 
full  legal  tender  power  until  the  Revision  Act  of  June  20, 
1874,  when  by  error  their  legal  tender  was 

Gold  coins. 

limited  to  five  dollars.  The  Bland- Allison  Act 
in  restoring  the  silver  dollar,  stipulated  that  it  should 
saver  possess  full  legal-tender  power,  for  all  debts 

doUars.  public  and  private  except  where  otherwise 
stipulated  in  contract. 

Half  dollars,  quarters,  and  dimes  until  1853  possessed 
full  legal  tender  power,  but  the  coinage  act  in  that  year 
Subsidiary  limited  their  legal  tender  to  sums  notexceed- 
sUver  coins,  jj^g  ^yg  doUars  in  any  one  payment.  This  re- 
mained in  force  until  the  act  of  June  9,  1879,  declared 
that  these  coins  should  be  legal  tender  in  all  sums  not 
Minor  exceeding  ten  dollars  in  payment  of  all  debts, 

coins.  public  and  private.     The  legal  tender  power 

of  nickels  and  pennies  was  by  the  Mint  Act  of  1873  fixed 
at  twenty-five  cents  in  any  one  payment. 

The  acts  authorizing   the  issue  of  greenbacks   de- 
clared that  they  should  be  legal  tender  for  all  debts 
public  and  private,  except  custom  duties  and  interest 
on  the  public  debt.     Later,  the  Supreme  Court 
declared    that   they   were   not    legal   tender 
for  taxes  nor  where  any  other  money  was  specifically 


MONEY   AND   CREDIT  321 

mentioned  in  contract.  Since  greenbacks  are  redeemable 
on  demand  in  gold,  very  little  attention  is  paid  to  these 
restrictions  upon  their  legal  tender  power. 

Gold  and  silver  certificates  are  receivable  for  customs, 
taxes,  and  all  public  dues,  but  are  not  legal  tender 
for   private   debts.    The   treasury   notes   of 
1890  are  receivable  for  all  public  dues  and  are  Gold  and 
legal  tender  unless  otherwise  stipulated  in  con-  tificates. 
tract. 

National  bank  notes  are  receivable  at  par  in  all  parts 
of  the  United  States  in  payment  of  taxes,  excise,  and  all 
other  dues  to  the  United  States,  except  for  duties  on 
imports,  and  must  be  accepted  for  all  salaries  _    , 

.  ...        Bank  notes. 

and  debts  owed  by  the  United  States  to  individ- 
uals, corporations,  and  associations  within  the  United 
States,  except  interest  on  the  pubHc  debt,  and  the  re- 
demption of  national  currency.  The  notes  must  be 
accepted  at  par  in  payments  between  national  banks, 
but  are  not  legal  tender  for  private  debts. 

Credit  is  the  greatest  economic  factor  in  our  indus- 
trial system  and  our  progress  would  have  been  impossible 
without  it.  It  does  not  arise  until  security  importance 
and  authority  are  thoroughly  estabUshed.  o^  credit. 
Modern  credit  did  not  assume  any  importance  until  the 
dawn  of  the  industrial  revolution.  The  great  progress 
of  the  nineteenth  century  was  due  more  to  credit  than 
to  any  other  factor.  To-day  there  is  not  a  large  enter- 
prise that  does  not  owe  a  large  part  of  its  success  to  credit. 
By  far  the  greater  part  of  business  is  done  through  it, 
and  its  place  in  the  industrial  system  is  assuming 
greater  and  greater  importance.    Destroy  the  average 


322  ECONOMICS  OF  BUSINESS 

man's  credit,  and  you  destroy  the  possibility  of  his  mak- 
ing a  success.  Blot  out  credit  in  general;  ruin  and 
destruction  immediately  follow.  Daniel  Webster  once 
remarked  that  credit  had  done  more  a  thousand  times 
to  enrich  nations  than  all  the  mines  of  the  world. 

Credit  may  be  defined  as  the  power  to  obtain  money, 
merchandise,  or  other  consideration  on  the  promise  of 
future  payment.  The  delivery  of  economic  goods  and 
Credit :  its  the  acceptance  of  a  promise  to  pay  depend  upon 
meaning.  |.j^g  confidence,  which  the  person  making  the 
delivery  has  in  the  person  receiving,  to  meet  the  future 
obligation.  Confidence  in  each  other's  honesty  is  accord- 
ingly the  basis  of  credit.  Remove  that  confidence  and 
you  destroy  credit. 

The  granting  of  too  Hberal  credit  has  in  the  past  been 
the  cause  of  bankruptcy  and  failure,  and  to-day  is  too 
freely  practiced.  The  lowering  of  margins  of  profit 
demanded  a  careful  study  of  credit,  and  the  possi- 
Reasons  for  bility  of  eliminating  losses  by  discrimination 
teres? in "  ^  ^^^  ^^^'  Discrimination  in  giving  credit  has 
credit.  become  a  necessity  in  business,  and  has  re- 

sulted in  a  careful  study  of  the  fundamentals  on  which 
it  is  based.  The  importance  of  the  credit  branch  of 
a  business  is  to-day  recognized  as  one  of  the  essential 
factors  of  business  success.  The  special  attention  paid 
to  credit  has  resulted  in  the  formulation  of  certain  prin- 
ciples which  are  profitable  for  business  men  to  know. 

Business  men  recognize  that  character,  ability  and 
capital  are  the  three  basic  fimdamentals  of  credit. 
These  essentials  should  be  considered  in  determining 
credit,  but  it  is  not  necessary  to  have  all  present  before 


MONEY  AND   CREDIT  323 

credit  is  granted.     If  all  three  are  found,  there  is  no 
hesitation  in  giving  credit  but  they  are  rarely  found  in 
one  case,  and  this  demands  a  careful  analysis  Basic 
of  those  found  to  determine  the  possibiUty  of  ,^nt^s  of 
the  person  seeking  credit  failing  to  keep  his  credit, 
promise.     Good   character  and  abihty   are  often   con- 
sidered sufficient  without  the  presence  of  capital.     Good 
character,  capital  and  no  abihty  are  considered  poor 
risks,   as  well  as  ability   and   capital    without    char- 
acter.    No    hard  and  fast  rules    can  be  laid   down, 
but   discrimination    in   granting    credit   is    necessary, 
and  depends  largely  upon  the   good  judgment  of  the 
credit  man. 

A  man's  character  is  an  important  consideration  in 
considering  the  acceptance  of  a  future  promise  to  pay. 
A  reputation  for  honesty  is  a  valuable  business  Character, 
asset.  Where  this  quahty  is  lacking,  few  chances  should 
be  taken  in  giving  credit.  Moral  habits,  manners, 
associations,  inclination  to  extravagance,  estimate  by 
business  associates,  and  honesty,  make  up  a  man's 
character  or  business  reputation.  A  careful  knowledge 
of  each  attribute  is  necessary  to  estimate  a  man's  charac- 
ter. A  man  with  a  good  character  can  be  depended  upon 
to  keep  his  promise  when  it  comes  due  or  as  soon  as  he 
is  able.  Character  is  so  essential  in  grant- 
ing credit  that  many  consider  it  the  chief 
element.  Character  alone  is  very  seldom  a  sufficient 
requisite,  as  in  a  business  enterprise,the  noblest  character 
on  earth  without  executive  ability  would  be  a  very  poor 
risk,  but  character  and  capacity  seldom  fail  to  obtain 
credit.    It  is  true  that  a  man  without  a  good  character 


324  ECONOMICS  OF  BUSINESS 

has  no  claim  to  credit  and  the  granting  of  such  by  busi- 
ness men  is  always  a  great  risk. 

Next  to  character,  ability  or  capacity  attracts 
the  most  attention.  The  ability  to  successfully  carry 
on  one's  special  business  is  a  question  which 
demands  careful  consideration.  A  grocer  may 
be  successful  in  his  business  and  command  good  credit, 
but  should  he  sell  out  and  engage  in  a  manufacturing  busi- 
ness, the  problem  of  credit  becomes  a  serious  one.  He  was 
a  good  grocer,  but  it  does  not  follow  that  he  will  make  a 
good  manufacturer.  Business  done,  profits,  methods  of 
management,  contentment  and  efficiency  of  laboring 
Tests  of  force,  all  should  be  considered  in  measuring 
abUity.  man's  capacity.     The  foregoing  are  tests  of 

efficient  management  in  a  going  concern,  and  apply  to 
corporations  and  partnerships  seeking  credit  as  well  as 
to  single  entrepreneurs. 

Credit  is  frequently  asked  by  men  to  open  new 
enterprises.  Many  have  not  had  the  experience  of  in- 
dependently conducting  a  business  undertaking,  do 
^    ^.  ,         not  possess  more  than  a  few  hundred  dollars 

Credit  for        .         ^.     ,  .  ,  ,.     ^ 

new  under-  m  capital  yet  Wish  credit  for  many  times  what 
takings.  ^^^^  possess.  Such  requests  should  not  all  be 
discarded,  for  many  prove  good  risks.  Many  of  our 
most  successful  merchants  and  manufacturers  had  Uttie 
capital  to  start,  and  had  to  rely  on  the  credit  given  by 
those  who  beheved  in  them.  The  decision  when  to 
give  credit  under  such  circumstances  tests  the  ability 
of  the  credit  man.  The  first  consideration  is  the 
character  of  the  applicant  and  too  great  emphasis 
cannot  be  placed  upon  the  absolute  necessity  of  a  thorough 


MONEY  AND   CREDIT  325 

investigation  into  his  character.  If  his  character  is  not 
beyond  reproach,  the  question  of  granting  credit  should 
not  be  any  further  considered. 

Being  satisfied  as  to  character  how  can  abiHty  be  judged  ? 
In  the  United  States,  about  twenty-five  per  cent  of  the 
failures  are  due  to  lack  of  ability.  What  expe- 
rience  has  the  applicant  for  credit  had  in  execu-  judge 
tive  work  ?  What  knowledge  has  he  of  the  busi-  *  ^ 
ness  he  wishes  to  undertake  ?  Has  he  managed  men,  and 
if  so,  what  has  been  his  success  ?  Is  he  thoroughly  ac- 
quainted with  the  requirements  of  his  proposed  business  ? 
Is  he  a  good  judge  of  business  conditions,  resourceful, 
and  industrious  ?  These  are  some  of  the  questions  which 
should  be  considered.  Usually  the  applicant  has 
little  capital,  and  his  obtaining  of  credit  depends  almost 
solely  upon  character  and  ability.  The  picking  out  of 
risks  that  are  good  from  those  that  are  bad,  demands 
sound  judgment,  and  the  ability  to  correctly  read 
human   character. 

The  third  fundamental  is  capital,  but  it  is  secondary 
to  the  other  two.  In  this  country,  about  one  third 
of  the  total  failures  results  from  lack  of  capital,  and  the 
largest  percentage  is  in  business  enterprises 

1  f      ,.   ,  .,7  .  ,  ,  ^    ^  Capital. 

where  the  liabmties  are  less  than  $10,000. 
Many,  to  get  trade,  are  willing  to  take  excessive 
risks,  and  do  not  consider  any  of  the  fundamentals. 
Many  business  men  furnish  a  full  business  outfit 
on  credit,  trusting  to  the  customer's  honesty  and 
abihty  to  make  the  concern  a  success.  These  exces- 
sive risks  occur  almost  entirely  in  enterprises  of  small 
capital,  and  as  we  have  seen,  it  is  here  that  the  greatest 


326  ECONOMICS  OF  BUSINESS 

number  of  failures  occur.  There  is  the  greatest  need  for 
discrimination  in  the  granting  of  credit  to  small  enter- 
prises. The  amoimt  of  capital  needed  in  any  concern 
depends  upon  the  size  and  kind  of  enterprise.  No  ab- 
solute rule  can  be  given  as  to  the  amount  of  capital 
necessary  before  credit  is  given.  Any  one  fundamental 
does  not  give  sufficient  basis  for  confidence,  and  credit 
should  not  be  granted  in  such  cases.  The  ideal  risk, 
of  course,  is  where  character,  abiUty  and  capital  are 
present. 

In  established  enterprises,  many  considerations  con- 
nected with  capital  enter  into  the  granting  of  credit. 
Considera-    What  is  the  amount  of  insurance  carried? 

tions  related  .    ,  -^        t    •  •       r        ■, 

to  capital.  What  stock  IS  carried  ?  Is  it  excessive  for  the 
amount  of  business  ?  Is  business  conducted  on  a  cash 
basis?  If  credit  is  given,  what  is  its  extent?  What 
amount  is  carried  on  books  ?  What  is  the  percentage  of 
bad  debts?  These  are  a  few  of  the  questions  which 
demand  consideration  in  all  kinds  of  business  enterprises. 
Each  question  has  a  certain  bearing  on  the  possibility 
of  a  man,  firm,  or  corporation  meeting  promises,  and 
should  not  be  overlooked  by  the  credit  man. 

Many  methods  are  in  use  for  the  gathering  of  data  and 
information  of  importance  to  the  credit  man.  During  the 
Salesmen  last  few  years,  a  great  improvement  has  taken 
of  credir  place  in  the  systematizing  of  information  gather- 
infonnation.  ing.  Salesmen  may  perform  an  important 
service  by  carefully  studying  the  business  habits,  repu- 
tation and  methods  of  customers.  Tact,  care  and  discre- 
tion should  be  exercised  in  gathering  the  desired  informa- 
tion so  as  not  to  be  objectionable  or  repulsive.    What  do 


MONEY  AND   CREDIT  327 

associates  think  of  customers  ?  Are  customers  lavish  in 
expenditures?  Do  they  spend  beyond  their  means? 
Are  they  intemperate?   What  are  their  business  _  . 

-'  ^        ^  ^  ^  Information, 

methods  ?  What  is  the  condition  of  stock  ?  salesmen 
What  is  the  feeling  of  employees  toward  ^^^"s**^®'"- 
the  business  ?  Is  the  business  cash  or  credit  ?  What 
is  the  amount  of  sales  ?  What  are  the  expenses  ?  What 
rent  is  paid  ?  What  are  the  net  earnings  ?  This  is  in- 
formation which  a  salesman  is  able  to  collect.  Every 
salesman  should  make  use  of  a  card  system  and  care- 
fully index  all  information.  It  will  not  take  long  to 
gather  important  credit  data  which  will  be  of  invaluable 
service  in  the  granting  of  credit. 

Attorneys  have  been  found  valuable  sources  for  the  col- 
lection of  credit  information.     In  their  business  relations 
with  men,  they  have  an  excellent  opportunity  ^^^^^  ^f 
for    getting    valuable    information    without  attorneys  to 

1  •     1      •  c       •         1  J  -K  /r  1  credit  men. 

disclosing  professional  secrets.  Many  lawyers 
are  making  a  specialty  of  collecting  credit  data.  The 
trouble  in  the  past  has  been  that  credit  men  have  ex- 
pected lawyers  to  answer  questions  and  furnish  informa- 
tion without  remuneration.  Little  attention  was  paid 
to  giving  information  and  little  dependence  could  be 
placed  upon  facts  received.  A  little  system  and  the 
proper  tabulation  of  information  on  cards  give  in  a 
short  time  a  valuable  information  bureau.  The  only 
incentive  to  collect  and  keep  reliable  information  is 
proper  remuneration.  This  induces  lawyers  to  pay 
careful  attention  to  facts,  and  makes  them  effective 
and  rehable  sources  for  gathering  information  for  credit 
men. 


328  ECONOMICS  OF  BUSINESS 

Credit  men  have  for  years  made  an  extensive  use  of 
banks  in  seeking  facts  about  persons  wishing  credit. 
Bankers        Bankers  usually  look  upon  credit  letters  of 

should  not       •  •  •  i    <  i  •      . » ^     i 

be  used  by  Inquiry  as  a  nmsance,  and  they  are  justified 
credit  men.  in  so  doing.  Many  such  letters  find  their  way 
at  once  to  the  wastebasket,  and  if  answered,  it  is  usually 
with  information  of  such  general  nature  that  little  reUance 
can  be  placed  upon  it.  The  questions  asked  are  usu- 
ally concerning  deposits,  indebtedness,  payment  of 
bills,  notes  and  drafts;  such  matters  are  private,  and 
should  not  be  disclosed.  If  a  merchant  discovers 
that  his  bank  is  giving  information  concerning  his 
private  affairs,  he  would  be  justified  in  at  once  changing 
his  bank.  Credit  men  should  find  other  sources  for 
information,  as  bankers  cannot  be  expected  to  disclose 
private  matters,  and  if  they  do,  they  are  disloyal  to 
their  depositors. 

The  best  known  source  for  collecting  credit  informa- 
tion is  the  mercantile  agency.  Dun  and  Bradstreet  are 
the  two  great  agencies,  and  they  are  sought  for  informa- 
Mercantue  tion  in  every  part  of  Canada  and  the  United 
agencies.  States.  Numerous  small  agencies  are  found  in 
all  parts  of  the  coimtry,  and  many  people  think  that  the 
work  of  the  agencies  is  indispensable  to  business.  The 
usual  practice  in  obtaining  information  is  to  collect 
periodical  reports.      Frequently  business  men 

Methods.  t    i  /--n  i  -i  •       -n 

are  rehed  upon  to  fill  out  the  reports,  and  m  all 
such  cases,  a  certain  amount  of  uncertainty  as  to  authen- 
ticity exists.  The  information  given  is  usually  based 
upon  these  reports,  and  as  a  result  cannot  always  be 
relied  upon. 


MONEY  AND   CREDIT  329 

A  recent  development  in  credit  economy  is  credit 
interchange,  which  is  an  exchange  of  information  between 
merchants  concerning  customers.  The  prac-  credit  in- 
tice  is  to  have  local  credit  associations.  Credit  terchanges. 
men  are  called  upon  to  give  from  ledgers,  the  methods  and 
promptness  of  customers  in  meeting  their  promises. 
The  carefully  arranged  information  is  for  the  use  of 
V  members,  and  exchange  for  credit  data  with  other 
credit  associations.  Efficient  credit  associations  are 
recognized  as  reliable  sources  for  information.  Their 
efficiency  depends  upon  the  questions  asked,  care 
in  answering,  the  arranging  and  the  filing  of  answers. 
Credit-association  bureaus  have  a  very  important  place 
in  credit  economy,  and  their  extension  to  efficient  state 
and  national  associations,  will  take  over  much  of  the  work 
of  the  mercantile  agencies. 

Many  business  houses  have  traveling  credit  men  visit 
their  customers  and  gather  necessary  informa-  Traveling 
tion.  The  traveling  credit  man  talks  overbusi-  *^'®^^*  °^®°- 
ness  affairs  with  customers,  observes  methods  of  doing 
business,  inspects  factory  or  stock,  examines  books,  and 
gathers  all  possible  facts  bearing  upon  the  character  and 
ability  of  the  customer.  He  may  also  gather  much  valu- 
able information  by  reading  local  papers,  and  through 
conversations  with  the  business  acquaintances  of  cus- 
tomers. A  good  traveling  credit  man  can  perform 
valuable  service,  but  tact,  abiHty  to  read  human 
character,  and  sound  judgment  are  required  to  obtain 
the  most  reliable  information. 

Business    men    frequently    ask    the    person    seeking 
credit  for  references,  and  these  are  consulted  personally 


330  ECONOMICS  OF  BUSINESS 

or  by  letter.     The  practice  is  very  common  throughout 

the  commercial   countries  of   the  world.    This   source 

is  not  rehable,  and  credit  men  who  depend 

References.  .  .  ■,  -, 

solely  upon  it  take  many  poor  risks.  The 
names  given  are  usually  those  of  business  associates 
and  friends  who  can  be  reUed  upon  to  make  favor- 
able reports.  Many  men  consider  credit  inquiries  a 
nuisance,  and  if  they  answer,  do  so  in  such  a  general 
way  that  the  information  given  is  of  little  value.  This 
method  of  obtaining  credit  information  is  usually  unsatis- 
factory and  is  rapidly  being  replaced  by  more  efi&cient 
methods. 

Business  men  to  obtain  credit  are  frequently  asked 
to  answer  certain  questions  about  business,  as  assets, 

liabilities,   and   methods   of   doing   business. 

Statements. 

Carefully  prepared  printed  forms  are  sent,  and 
the  business  men  are  asked  to  fill  them  out  and  return. 
The  reports  are  not  only  required  when  first  obtaining 
credit,  but  at  regular  intervals  as  long  as  credit  is  desired. 
This  method  with  the  average  business  man  is  reUable 
and  satisfactory.  Efficiency  depends  largely  upon  the 
printed  blank  forms  which  should  clearly  state  the 
needed  information. 

Business  houses  in  many  cities  have  special  clerks 
who  make  investigation  concerning  persons  with  whom 
credit  business  is  done.  These  clerks  interview  people 
Oral  in-  given  as  references,  places  of  business,  and 
formation,  other  places  where  the  persons  under  inquiry 
trade.  Many  make  acquaintances  with  friends,  business 
associates,  and  clerks,  and  by  adroit  questions  obtain 
valuable  information.     Irregularities  are  frequently  dis' 


MONEY  AND   CREDIT 


331 


covered  and  the  demanding  of  payment  often  saves 
losses.  Oral  investigations  are  very  helpful,  and  if 
properly  conducted  will  yearly  save  many  times  the  cost. 
Credit  has  an  important  bearing  upon  every  phase 
of  industrial  activity.  Recent  years  have  introduced 
many  changes  in  credit  giving,  and  the  result  has  been 
a  working,  through  the  elimination  of  losses,  towards 
^  greater  business  stability.  Discrimination  in  credit 
giving  is  a  very  important  business  element,  and  one 
which  if  properly  exercised  often  brings  success  in  place 
of  failure.  The  granting  of  credit  demands  not  only 
a  thorough  knowledge  of  character,  but  ability  to  judge 
capacity,  and  the  necessity  of  capital.  No  branch  of 
business  requires  greater  shrewdness,  and  has  a  greater 
bearing  upon  success  than  wisdom  in  granting  credit. 

QUESTIONS 

1.  What  is  money?  Mention  the  materials  which  have 
been  used  as  money. 

2.  Name  and  explain  the  functions  of  money.  Explain 
the  different  methods  of  charging  for  coinage. 

3.  Define  coinage;  restricted  coinage;  standard  money; 
subsidiary  money ;  standard  gold. 

4.  Explain  the  system  of  redemption  of  coinage.  Why 
is  the  redemption  of  the  silver  dollar  indirect  ? 

5.  Give  a  short  history  of  the  silver  dollar.  What  was 
the  trade  dollar  ? 

6.  Explain  greenbacks;  silver  certificates;  gold  certifi- 
cates ;  treasury  notes ;  bank  notes.  Mention  legislative  acts 
affecting  greenbacks,  1862  to  1879. 

7.  What  is  legal  tender?  Give  legal-tender  powers  of 
different  kinds  of  currency. 


332  ECONOMICS  OF  BUSINESS 

8.  What  is  credit  ?    Give  its  importance  in  our  industrial 
system. 

9.  Name  and  explain  the  fundamentals  of  credit. 

10.  What  should  be  considered  in  granting  credit  to  new 
customers  ?    What  are  the  tests  of  ability  ? 

11.  What  considerations  are  related  to  capital  in  granting 
credit  ? 

12.  How  may  a  salesman  collect  credit  information  ?  What 
is  the  place  of  the  attorney  in  credit  economy  ? 

13.  Criticize  the  following  methods  of  collecting  informa- 
tion: (a)  bankers;  (b)  references;  (c)  reports  and  state- 
ments. 

14.  What  is  the  place  of  the  mercantile  agency  in  our 
business  activities  ?     Criticize  its  methods. 

15.  What  is  the  function  of  the  credit  association?  Upon 
what  does  its  efficiency  depend  ? 

REFERENCES 

H.  White,  "Money  and  Banking,"  Bk.  I,  Chs.  I,  II,  III, 
Bk.  II,  Ch.  Ill;  W.  S.  Jevons,  "Money  and  the  Mechanism 
of  Exchange,"  Chs.  I  to  VII  (inc.);  J.  K.  Upton,  "Money 
in  Politics,"  Chs.  I,  III,  XII,  XIX;  J.  F.  Johnson,  "Money 
and  Currency,"  Chs.  I,  XIII,  XVI ;  D.  K.  Watson,  "History 
of  American  Coinage";  F.  A.  Walker,  "Money,"  Chs.  I,  II, 
IX,  X;  D.  Kinley,  "Money,"  Chs.  II,  III,  V;  J.  L.  Laugh- 
lin,  "The  Principles  of  Money,"  Chs.  I  and  II ;  C.  A.  Conant, 
"The  Prmciples  of  Money  and  Banking,"  Vol.  I,  Bk.  I; 
A.  B.  Hepburn,  "Contest  for  Sound  Money";  W.  Aldrich, 
"Money  and  Credit,"  Chs.  I,  II,  V;  S.  E.  Sparling,  "Busi- 
ness Organization,"  Ch.  XIV;  W.  D.  Moody,  "Men  Who 
Sell  Things,"  Ch.  XIX;  I.  J.  Zimmerman,  "Credits  and 
Collections,"  "Lectures  on  Commerce,"  University  of 
Chicago,   Vol.   I;  T.   B.    Goddard,   "Giving   and   Getting 


MONEY  AND   CREDIT  333 

Credit,"  Chs.  I,  II,  IV,  V;  W.  A.  Prendergast,  "Credit  and 
its  Uses,"  Business  Men's  Library,  Vol.  I;  E.  S.  Lewis, 
"The  Credit  Man  and  His  Work,"  J.  L.  Laughlin,  "Credit" ; 
C.  W.  Bryan,  "Credit,  its  Meaning  and  Moment";  P.  R. 
Earling,  "Whom  to  Trust";  S.  Colwell,  "Ways  and  Means 
of  Payment";  J.  G.  Cannon,  "Individual  Credits";  W.  H. 
Preston,  "Credits,  Collections  and  their  Management"; 
H.  C.  Lawrence,  "  Turning  Him  Down." 


CHAPTER  XV 

TRADE  MARKS  AND  COPYRIGHTS 

The  production  of  goods  after  the  introduction  of  the 
factory  system  increased  at  a  rapid  rate,  and  soon  it 
The  grow-  ^as  necessary  for  the  manufacturer  to  seek 
ing  impor-     distant  markets.     He  could  sell  his  goods  but 

tance  of  the  .  i •  rr       i  •        ^     ^  ^^ 

selling  de-  experienced  great  dimculty  in  holding  the 
partment.  trade.  Without  some  means  of  guaranteeing 
the  sale  of  his  product,  he  was  at  the  mercy  of  the 
jobber  and  the  retailer,  who  could  easily  substitute 
other  goods  for  his.  The  guarantee  and  safeguard 
Trade  was  found  in  the  trade  mark,  and  its  impor- 

°^^-  tance  as  a  factor  in  the  commercial  world 

soon  assumed  great  significance.  The  ultimate  con- 
sumer, whether  he  hved  in  Australia  or  in  Italy,  soon 
learned  to  call  an  article  by  its  trade-mark  name  and 
could  not  be  deceived  by  having  another  article  sub- 
stituted for  it.     In  any  part  of  the  world,  a 

Protects  1  •!  -I  1  c  1        r 

the  con-  child  cau  be  sent  to  a  drug  store  for  a  cake  oi 
weu^as*^  Pear's  soap  and  all  that  it  is  necessary  to  do  is 
the  pro-  to  Hsp  "Pear's"  and  the  desired  article  is  ob- 
tained. The  trade  mark  assures  the  consumer 
that  he  gets  what  he  wishes,  and  at  the  same  time,  it 
serves  to  protect  the  manufacturer  against  the  sub- 
stitution of  another  article  for  his. 

A  trade  mark  is  a  person's  commercial  signature  to  his 

334 


TRADE   MARKS   AND   COPYRIGHTS         535 

goods.     It  is  any  device,  sign,  mark,  symbol,  word  or 
words,  letter,  numeral,  or  any  combination  its  mean- 
thereof  used,  or  proposed  to  be  used,  upon  or  in  "*«• 
connection  with  goods  for  the  purpose  of  indicating  their 
origin.     The  chief  function  of  a  trade  mark  is  to  point 
out  origin.     It  must,  when  attached  to  goods  Chief 
on  the  market,  distinguish  them  as  to  origin  p^nf out*° 
^from  other  goods  of  the  same  class,  but  the  origin, 
origin  may  be  indicated  directly  or  indirectly  through 
association.     The  manufacturer's  or  the  dealer's  name 
and  address  may  be  wholly  wanting,  and  the  indication 
of  origin  may  be  the  result  of  an  association  between  the 
trade  mark  and  the  article  to  which  it  is  attached  on  the 
one  hand,  and  the  manufacturer  or  the  dealer  on  the  other. 
It  is  enough  if  the  mark  is  of  such  a  character  origin  may 
as  to  indicate  to  the  purchaser  that  all  the  ^e  "^di- 
articles  bearing  it  come  from  one  and  the  directly  or 
same  source.     Validity  in  every  case  depends  "^^"■ectiy. 
upon  pointing  out  the  origin  of  the  article  to  which  the 
trade  mark  is  attached,  and  this  may  be  accomplished 
either  in  its  own  meaning  or  by  association. 

Many  people  beheve  that  the  trade  mark  is  a  product 
of  the  factory  system.     Its  extensive  use  is  recent,  but 
its  existence  can  be  traced  back  through  many        . 
centuries.     The  practice  originally  grew  out  of  trade 
the  use  of  signs  which  were  affixed  to  dealers'  °^  ^* 
shops,  and  which  were  eventually  placed  on  the  goods 
sold  from  the  shops.      Water  marks  on  paper,  dating 
from  the  fourteenth  century,  are  among  the  oldest  trade 
marks.    Throughout  the  centuries  of  its  existence,  the 
purpose  of  the  trade  mark  has  always  remained  the  same, 


336  ECONOMICS  OF  BUSINESS 

i.e.,  to  indicate  the  origin  of  an  article  offered  in  the 
market. 

A  trade  mark  stands  for  a  brand  of  goods,  and  after 
many  years  of  use,  it  often  becomes  associated  with  the 
Trade  mark  particular  quality  of  the  article  to  which  it  is 
a  valuable  afl&xed.  It  has  frequently  taken  thousands  of 
asset.  dollars  and  years  of  hard  work  to  build  up  the 

reputation  of  the  goods  named  by  a  trade  mark.  The 
value  of  a  mark  depends  entirely  upon  the  popularity 
of  the  article  which  bears  its  name.  A  trade  mark  is 
attached  to  the  business  where  it  originated,  and  cannot 
be  transferred  without  transfer  of  business.  After  years 
of  profitable  business,  a  mark  often  becomes  the  most 
valuable  asset  of  a  business  enterprise.  It  is  difficult 
to  place  a  definite  value  upon  a  trade  mark,  but  in 
many  instances,  its  estimated  worth  is  placed  at  large 
sums.  The  trade  marks  of  The  American  Tobacco 
Company  were  valued  recently  at  forty-five  million 
dollars,  while  Royal,  as  applied  to  baking  powder, 
Uneeda,  Ivory,  Pear's,  and  Coca-Cola  are  each  worth 
one  or  more  million  dollars. 

Trade  marks  are  not  the  creation  of  statute,  as  the 
right  of  the  manufacturers  to  be  protected  by  their 
N  the  ^^^  existed  long  before  there  was  any  trade- 
creation  mark  legislation .  B  ef  ore  trade  marks  were  pro- 
of statute,  iqqx,^^  by  special  legislation,  cases  of  infringe- 
ment came  under  common  law.  During  the  eighteenth 
century,  a  few  scattered  cases  were  decided,  but  they  were 
almost  wholly  based  on  the  question  of  fraud.  It  is  a 
well-known  fact  that  as  soon  as  a  thing  becomes  valuable 
or  desirable,  its  regulation  and  protection  become  the 


TRADE   MARKS   AND   COPYRIGHTS        337 

subject  of  legal  enactment.  The  first  traces  of  trade- 
mark legislation  are  found  at  the  beginning  of  the  nine- 
teenth century,  but  the  great  mass  of  trade-mark  law  is 
the  development  of  the  last  fifty  years. 

Trade  marks,  according  to  the  Act  of  1905,  are  regis- 
tered in  the  United  States  Patent  Office.  The  statute 
provides  a  definite  procedure  for  trade-mark  procedure 
registration,  lays  down  rules  for  vaUdity,  and  provided  by 
provides  that  in  case  of  infringement  of  regis- 
tered trade  marks,  the  decision  rests  with  the  federal 
courts.  Every  trade  mark,  when  registered,  becomes 
a  part  of  the  pubHc  records  of  the  United  States. 

Registration  is  not  necessary  in  order  that  a  person 
might  receive  legal  protection  for  a  trade  mark's  exclusive 
use,  because  its  right  is  recognized  by  common  Tra^e 
law.     The  Supreme  Court  of  the  United  States  "^arks  pro- 
has  declared  that  the  right  to  adopt  and  to  common 
use  a  symbol  or  device  to  distinguish  the  goods  ^*^* 
and  property  made  and  sold  by  the  person,  whose  mark 
it  is,  to  the  exclusion  of  use  by  all  others,  has  been  long 
recognized  by  the  common  law  and  by  the  Chancery 
Courts  of    England   and   the  United    States.      Trade 
mark  is  a  property  right  for  the  violation  of  which, 
damages  may  be  recovered  in  a  legal  action.     Trade 
marks  existing  under  common  law  are  protected  by  courts 
of  equity. 

When  litigation  arises  over  the  use  of  a  trade  mark, 
the    user   must   prove   priority  in    use    and  Advantages 
ownership.     If  registered,  the  public  records  tered^txade 
establish  the  first  use  of  the  trade  mark,  but  marks, 
when  not  registered,  the  proper  evidence  is  often  hard 


338  ECONOMICS  OF  BUSINESS 

to  obtain.  In  case  of  infringement  of  unregistered  trade 
marks,  the  litigation  does  not  come  under  federal  law 
unless  the  parties  are  citizens  of  different  states. 

A  fee  of  ten  dollars  is  charged  for  registration  of  every 
trade  mark.  Registration  remains  in  force  for  twenty 
Fee  and  years,  and  may  be  renewed  upon  expiration  for 
*^*-  like  periods  of  twenty  years,  upon  payment 

of  a  renewal  fee  of  ten  dollars. 

An  individual  or  a  corporation  has  a  right  to  register 
a  trade  mark,  provided  the  appUcant  resides  within 
territory  imder  the  jurisdiction  of  the  United 
to  whom  States,  or  in  any  foreign  country  which  affords 
*^*^'®  by  treaty  like   privileges   to  citizens   of  the 

United  States.  The  trade  mark  must  belong  to  the  ap- 
pUcant and  be  used  by  him  in  commerce  within  the  state, 
with  foreign  nations,  with  the  several  states  and  terri- 
tories, or  with  the  Indian  tribes. 

An  appUcation  for  registration  must  be  made  to  the 
Commissioner  of  Patents  and  comprises  first,  a  petition 
requesting  registration  signed  by  the  applicant ;  secondly, 
Essentials  ^  Statement,  giving  the  name,  domicile,  loca- 
of  an  appU-  tion  and  citizenship  of  the  applicant,  and  if  the 
cabon.  applicant  is  a  corporation  or  association,  the 

state  or  nation  under  the  laws  of  which  organized ;  thirdly, 
the  class  of  merchandise  according  to  official  classification, 
and  the  particular  description  of  goods  in  such  class  upon 
which  the  trade  mark  is  actually  used,  or  proposed  to 
be  used ;  fourthly,  a  statement  of  the  mode  in  which  the 
trade  mark  is  affixed  to  the  goods  and  the  length  of  time 
it  has  been  used  upon  the  goods  specified;  fifthly,  a 
description  of  the  trade  mark  if  desired  by  the  applicant 


TRADE   MARKS   AND   COPYRIGHTS        339 

or  required  by  the  Commissioner ;  sixthly,  a  declaration 
by  the  applicant  that  to  the  best  of  his  knowledge,  no 
other  person,  firm,  corporation  or  association  has  the 
right  to  use  such  trade  mark  in  the  United  States,  either 
in  the  identical  form  or  in  such  near  resemblance  that  it 
might  deceive,  that  such  trade  mark  is  used  in  lawful 
commerce  and  that  the  description  and  drawing  presented 
vtruly  represents  the  trade  mark  sought  to  be  registered ; 
seventhly,  a  drawing  of  the  trade  mark  signed  by  the 
appHcant  or  his  attorney  which  shall  be  a  facsimile  of 
the  same  as  actually  used  upon  the  goods ;  eighthly,  five 
specimens  of  the  trade  mark;  and  lastly,  a  fee  of  ten 
dollars.  The  petition,  the  statement,  and  the  declara- 
tion must  be  in  the  EngKsh  language  and  written  on 
one  side  of  the  paper. 

All  petitions  are  considered  by  the  examiner  in  charge 
of  trade  marks.     Careful  investigation  is  made  of  each 
application,  and  if  it  is  decided  that  the  applicant  is 
entitled  to  the  registration  of  his  trade  mark,  the  mark 
is  published  at  least  once  in  the  Official  Gazette.    Any 
person  who  believes  that  he  would  be  damaged  by  the 
registration  of  a  trade  mark  may  file  a  written  notice 
of  opposition  stating  the  grounds  thereof  within  thirty 
days  after  the  pubHcation  of  the  trade  mark.  Notice  of 
Any  opposition  is  null  and  void  unless  duly  opposition, 
verified  by  the  opposer  within  reasonable  time  after 
fifing.     If  no  notice  of  opposition  is  filed  within  the  re- 
quired thirty  days,  the  appHcant  or  his  at-  certificate 
torney  is  notified  of  the  allowance  of  the  ap-  ofregistra- 
plication  and  a  certificate  of  registration  is 
issued.     Whenever  an  appHcation  is  refused,  the  appli- 


340  ECONOMICS  OF  BUSINESS 

cant  is  notified  and  given  the  reasons  for  refusal  and 
such  information  as  will  assist  him  to  judge  of  the  advis- 
ability of  further  prosecuting  his  appHcation. 

Any  person  deeming  himself  injured  by  the  registra- 
tion of  a  trade  mark  may  at  any  time  make  application 
CanceUa-  ^^  ^^^  Commissioner  of  Patents  for  its  can- 
tion  of  cellation.  If,  after  a  hearing  before  the  ex- 
aminer of  interferences,  it  is  decided  that  the 
registrant  was  not  entitled  to  the  use  of  the  mark  on  the 
date  of  his  application  for  registration,  the  Commissioner, 
unless  an  appeal  be  taken  within  the  required  time  limit, 
cancels  the  registration. 

Whenever  an  application  is  made  for  the  registration  of 
a  trade  mark  which  is  substantially  identical  with  a  trade 
Inter-  mark  issued  previously  to  another,  or  for  the 

ferencc.  registration  of  which,  another  had  previously 
made  application,  or  which  so  nearly  resembles  another 
as,  in  the  opinion  of  the  Commissioner,  is  likely  to  be 
mistaken  by  the  public,  an  interference  is  declared.  An 
interference  is  a  proceeding  instituted  for  the  purpose  of 
determining  the  question  of  priority  of  a  trade  mark  be- 
tween two  or  more  parties  claiming  substantially  the 
same  mark. 

If  the  examiner  of  trade  marks  renders  an  adverse 
decision  upon  an  applicant's  right  to  register  a  trade 
Appeal  mark,  or  renew  the  registration  of  one,  or  when 

when  inter-    ^j^^  examiner  in  charge  of  interferences  refuses 

ference  is  *^  ^ 

refused.  an  interference,  opposition  or  cancellation,  an 
appeal  may  be  taken  to  the  Commissioner  in  person. 
From  an  adverse  decision  by  the  Commissioner  in  each 
of  the  above-mentioned  cases,  an  appeal  may  be  taken  to 


TRADE   MARKS   AND   COPYRIGHTS        341 

the  court  of  appeals  of  the  District  of  Columbia.  A 
fee  of  ten  dollars  must  accompany  the  filing  of  a  notice 
of  opposition  and  fifteen  dollars  for  each  appeal. 

A  trade  mark,  to  be  registered,  must  not  come  under 
the  following  prohibitions :  a  design  or  wording  identical 
with  the  registered  or  known  trade  mark  Restrictions 
owned  or  in  use  by  another  or  which  so  closely  Ranting  of 
^resembles  as  to  deceive  or  cause  confusion  in  trademarks, 
the  minds  of  purchasers ;  the  insignia  of  the  American 
Red  Cross  Association ;  the  flag  or  coat  of  arms  of  any 
foreign  nation;  any  design  or  picture  that  has  been 
adopted  by  any  fraternal  society  as  its  emblem;  the 
portrait  of  a  living  individual  except  with  the  consent 
in  writing  of  the  individual;  the  flag  or  coat  of  arms 
of  the  United  States  or  of  any  state  or  munici- 
pality, or  of  any  foreign  nation,  or  any  insignia 
thereof;  immoral  or  scandalous  matter  of  any  kind; 
a  geographical  name  or  term;  a  misrepresentation 
of  the  quality,  composition,  character  or  origin  of 
the  article  on  which  it  is  used;  any  mark  which  con- 
sists merely  of  the  name  of  an  individual,  firm,  corpora- 
tion, or  association  not  written,  printed,  embossed,  or 
woven  in  some  distinct  manner,  or  used  in  connection 
with  the  portrait  of  an  individual;  devices  which  are 
descriptive  of  the  character  or  quality  of  the  goods 
with  which  they  are  used. 

An  applicant  for  a  trade  mark  must  be  its  owner,  and 
use  it  in  lawful  trade.  A  trade  mark  cannot  be  ob- 
tained for  future  use,  but  the  exposure  for  sale  of  a  single 
article  with  mark  attached  meets  the  requirements  of 
the  law.     A  trade  mark  must  be  attached  either  by  being 


342  ECONOMICS  OF  BUSINESS 

printed,  pasted,  written,  stamped,  sewed,  or  woven 
Trade  mark  ^pon  the  article,  but  where  not  practicable  to 
must  be  at-    attach  to  the  article,  it  may  be  affixed  to  the 

tachedto  .  .  '  -^       .  ,   r  i 

goods  or  contamer.  A  mark  must  not  be  used  for  ad- 
containers.  yertising  purposcs.  A  device  used  in  circulars 
or  on  letter  heads  cannot  be  registered,  or  protected 
under  trade-mark  law. 

The  general  class  of  merchandise,  as  well  as  the  special 
article  of  that  class  for  which  the  trade  mark  is  used,  must 
be  stated  in  the  application.  The  name  for  one  kind  of 
goods  may  be  registered  as  the  trade  mark  for  another 
imrelated  kind.  The  trade  marks  ''Ideal,"  ''Columbia" 
Notice  of  and  "Eureka"  are  used  for  many  articles, 
registration.  Notice  of  registration  must  be  affixed,  printed, 
or  embossed  upon  the  trade  mark  or  close  to  it,  so  that 
it  can  be  easily  seen.  This  usually  takes  the  form  of  the 
Require-  words  "Registered  in  United  States  Patent 
ments.  Office,"  or    its  abbreviated    form.     Such   a 

notice  is  necessary  because  the  owner  of  a  trade  mark, 
in  legal  proceedings  arising  out  of  infringement,  cannot 
get  damages,  unless  he  can  prove  that  he  gave  the 
party  formal  notice  that  the  mark  was  his  property, 
and  that  its  imauthorized  use  was  continued  after  notice. 

Every  man  has  a  right  to  use  his  own  name  as  his  trade 
mark,  but  the  court  frequently  designates  the  manner 
A  person  ^^  ^^^  ^^^-  ^  person  bearing  the  same  name 
is  restricted  as  a  competitor,  or  even  one  which  resembles 
his  own  it,  in  such  a  way  as  to  deceive  the  average  pur- 
^°^®*  chaser  will  not  be  allowed  to  use  it,  in  the  same 

manner,  as  the  one  proving  priority.  He  may,  never- 
theless, use  his  name  but  it  must  be  in  some  distinctive 


TRADE   MARKS  AND   COPYRIGHTS        343 

form,  so  as  not  to  confuse  the  buyer  of  the  original  article. 
W.  H.  Baker,  a  manufacturer  of  chocolate,  and  a  compet- 
itor of  Walter  Baker  &  Co.,  was  forbidden  to  use  ''Baker," 
''.Baker's"  or  "W.  H.  Baker  &  Co.,"  but  was  required 
to  use  "W.  H.  Baker  of  Winchester,  Va.,"  and  also  in 
prominent  type  the  statement,  "  W.  H.  Baker  is  distinct 
from  the  old  chocolate  manufacturer,  Walter  Baker  &  Co." 
Geographical  names  designating  districts  of  country 
cannot  be  protected  as  vaHd  trade  marks.     They  do  not 
point  to  the  origin  or  ownership  of  an  article,   Geographi- 
but  to  the  place  of  production,  and  could  they  c^i  names 
be  appropriated  exclusively,  would  result  in  trade 
monopolies.     The  name  of  a  district  belongs  to  "^"^^• 
all,  and  cannot  be  appropriated  to  a  special  use.     No 
one  can  use  the  name  of  a  district  as  a  trade  mark,  and 
prevent  others  inhabiting  the  district,  or  dealing  in  similar 
articles  coming  from  the  district,  from  using  it,  in  the 
same  way.     There  are  some  exceptions.     If  a  word  in  its 
primary  meaning  is  not  geographical,  it  is  not  rendered 
incapable  of  registration,  by  the  mere  fact  that  it  has  been 
adopted  as  the  name  of  a  post-office,  railroad  station, 
or  even  a  village  or  town.     A  geographic  name  which 
has  no  connection  or  association  with  a  good  may  often 
be  chosen  as  a  trade  mark,  as  for  example,  "Vienna  "  for 
bread,  "Dublin"  for  soap,  and  "Gibraltar"  ^ 
for  belting.     These  names  are  used  to  desig-  graphic 
nate  no  particular  locaUty  connected  with  u^ex^er- 
a  business,  but  as  fanciful  designations  to  dis-  ^^  <=o^- 

ditions  be 

tinguish  the  product  from  others.     No  one  used  as  a 
would    believe    that    the    bread  was    made  trademark, 
in   Vienna,    the   soap   in    Dublin,    or    the   belting  in 


344  ECONOMICS  OF  BUSINESS 

Gibraltar.  Again,  a  person  using  a  geographic  name 
for  ten  years  previous  to  the  passing  of  the  Act  of  1905, 
may  have  the  same  registered  to  the  exckision  of  all 
others,  as  *' Elgin"  and  "Waltham"  as  applied  to 
watches,  and  "Kalamazoo"  to  underwear. 

A  trade  mark  to  be  registered  or  recognized  by  the 
courts  must  not  be  a  mark,  merely  descriptive  of  an 
Trademark  article  of  trade,  its  quahties,  ingredients,  or 
d'eTcriptive*  characteristics.  If,  however,  the  primary  ob- 
of  article.  ject  of  the  mark  is  to  point  out  the  origin, 
the  fact  that  after  long  use  it  has  come  to  stand  for 
high  quaUty  is  not  of  itself  sufficient  to  debar  it  from 
protection.  No  objection  can  be  raised  to  a  trade 
mark,  that  is  suggestive  of  the  qualities  of  an  article 
upon  which  it  is  used,  if  not  actually  descriptive  thereof. 
Instances  of  descriptive  words  not  protected  under  trade- 
mark laws  are  "Sweet  Caporal,"  "Snowflake,"  "Des- 
iccated Codfish,"  "Fig  Syrup,"  "Cramp  Cure,"  "Borax 
Soap,"  and  "Cherry  Pectoral." 

Trade-mark  laws  will  not  protect  any  trade  mark  even 
if  registered,  if  it  can  be  proved,  that  it  is  deceptive  or  in 
Protection  ^^y  ^^Y  ringed  with  fraud.  A  trade  mark 
not  given  must  not  give  a  false  impression  as  to  the 
mark  tinged  qualities,  ingredients  and  characteristics  of  an 
with  fraud,  article.  Courts  are  very  strict  in  refusing  aid 
to  any  one,  who  has  made  misstatements,  as  to  the  in- 
gredients of  which  an  article  is  composed.  If  a  trade 
mark  represents  an  article  as  patented,  and  it  is  not, 
protection  will  not  be  granted.  False  statements  in  ad- 
vertisements are  as  fatal  as  similar  statements  made  in 
trade  marks.    The  court  will  not  give  its  aid  to  sustain 


TRx\DE   MARKS   AND   COPYRIGHTS        345 

the  claim  of  a  trade  mark,  which  is  put  forth  with  a 
misrepresentation,  as  to  its  manufacture.  Protection 
is  not  given  when  a  trade  mark  is  used  for  articles  other 
than  the  one  for  which  it  is  registered.  A  trade  mark 
will  be  refused  if  considered  by  government  officials  as 
contrary  to  pubHc  poHcy.  A  trade  mark  apphes  to  a 
certain  definite  article,  and  not  to  all  produced  by  the 
same  person,  but  in  Great  Britain  and  Canada,  the  law 
allows  a  general  trade  mark  to  be  affixed  to  all  the  dijffer- 
ent  articles  manufactured  by  one  individual,  firm  or 
association. 

A  great  variety  of  designs,  symbols,  words  and  com- 
binations of  these  can  be  registered  as  trade  marks,  as 
for  instance,  a  common  word  like  ''Star";  a  „  . 

'       .  '        Vanous 

personal  word  Hke  ''Hires" ;  a  coined  word  as  trade 
"Cuticura";  a  fanciful  name  as  "Sorosis";  °^*^^^- 
a  fanciful  phrase  as  "La  Favorita";  letters  as  "O.K."; 
numerals  as  "303  " ;  a  picture  or  a  symbol  as  Bull  Dur- 
ham ;  and  a  portrait  as  Robert  Burns. 

The  owner  of  an  article  protected  by  patent  cannot 
extend  his  monopoly  after  the  expiration  of  the  patent 
by  incorporating  into  a  trade  mark  the  dis-  cannot  use 
tinctive  name  by  which  his  patented  article  t^^de  mark 

-  ,  1  ,.      1      .  1  .  to  extend 

was  known  to  the  public  durmg  the  existence  monopoly 
of  the  patent.  If  a  trade  mark  has  been  in  o^p**®^*- 
use  for  a  patented  article,  and  it  has  been  sold  as  such, 
the  right  to  the  exclusive  name  ceases  with  the  termina- 
tion of  the  patent.  A  trade  mark  cannot  be  made  the 
guise  for  extending  the  monopoly,  or  preventing  the 
name  from  becoming,  at  the  expiration  of  the  patent, 
the  property  of  the  pubKc. 


546  ECONOMICS  OF  BUSINESS 

The  owner  of  a  trade  mark  is  entitled  to  its  exclusive 
use,  and  the  law  is  strict  as  to  any  infringement  upon 
Infringe-  that  right.  An  infringement  is  any  imitation 
™®°*-  of  an  existing  trade  mark  of  such  a  nature  as 

to  deceive  the  ordinary  purchaser  buying  with  usual 
care.  The  likeness  may  be  in  appearance,  wording. 
Its  mean-  OT  sound.  The  federal  courts  hold  that  the 
^-  test  is  the  deception  of  the  purchaser  exercising 

the  usual  care  in  buying.  *'Gold  Dust"  is  infringed  by 
''Gold  Drops,"  ''Cascarets"  by  ^'Castorets,"  ''Sea 
Foam"  by  "Soda  Foam,"  "Yusea"  by  "U-C-A"; 
but  "Cuticle"  does  not  infringe  "Cuticura"  nor  does 
"Grain  Hearts,"  "Grape  Nuts."  A  similarity  in  mean- 
ing is  not  infringement.  " Hurricane "  and  "Tempest," 
two  trade  marks  of  lanterns,  are  valid  as  well  as  "S.  B. " 
and  "B.  &  S.,"  two  marks  for  cough  drops.  Agreement 
among  owners  of  conflicting  devices  is  not  recognized 
by  the  Commissioner  of  Patents. 

The  burden  of  proof  lies  with  the  owner  of  the  trade 
mark  alleged  to  be  infringed.  In  the  federal  court,  if 
Punish.  the  case  of  infringement  is  estabHshed,  triple 
ment.  damages  may  be  collected,  and  the  offending 

party  is  forbidden  to  use  the  trade  mark.  Many  states 
have  passed  laws  making  infringement  of  trade  mark  a 
penal  offense,  but  in  the  federal  court  only  civil  action 
can  be  brought. 

The  invention  of  printing  made  copying  easy,  and 
authors  demanded  protection  from  theft  of  their  published 
work.  A  statute  in  the  reign  of  Queen  Anne  is  the  basis 
of  the  present  copyright  system  of  England  and  of  the 
United  States.     It  gave  to  the  author  of  a  work  in  ex- 


TRADE  MARKS   AND   COPYRIGHTS        347 

istence,  the  sole  right  of  publication  for  a  period  of. 
twenty-one  years,  and  for  works  produced  in 
the  future,  the  same  right  for  fourteen  years.   Queen 
In  the  latter  case,  if  the  author  were  Hving  at  ^^^^^^ 
the  expiration  of  his   term  of   copyright,   it  copyright 
could  be  extended  for  a  Hke  term. 

Two  legal  meanings  are  included  in  the  word  copyright. 
The  first  is  the  right  which  an  author  has  in  his  copy. 
This  is  recognized  as  property  and  is  pro- 
tected by  common  law  just  Hke  any  other 
personal  property.     The  second  is  the  author's  exclusive 
right  to  the  publication  of  his  work,  which  is  j^^  ^^^ 
not  recognized  by  common  law,  and  protec-  legal  mean- 
tion  comes  only  through  legislative  enactment.  "^^^* 

The  Constitution  of  the  United  States  gives  to  Congress 
the  power  to  give  authors  the  exclusive  right  to  their 

works.        Previous    to     1790,    twelve    of     the    Congress 

thirteen  states  passed   copyright  laws,    but  oyg/®^®' 
the  federal  act  in  that  year  made  the  state  copyrights, 
acts  unnecessary.     Amendments  were  made  from  time 
to  time  until  1909,  when  a  law  was  passed,  which  repealed 
all  previous  legislation  and  provided  for  the  whole  sub- 
ject of  copyright  by  a  new  code. 

Copyright  protection  is  granted  to  an  author  if  he  is: 
a  citizen  of  the  United  States;  a  resident  alien  domiciled 
in  the  United  States  at  the  time  of  the  first  QuaUfica- 
pubHcation  of  his  work ;  or  a  subject  of  any  cop^^ght 
country,  which  grants  to  citizens  of  the  United  protection. 
States,  the  benefit  of  copyright  on  substantially  the  same 
basis  as  its  own  citizens.     The  same  protection  is  like- 
wise granted  to  a  proprietor  or  a  person  who  buys  or 


348  ECONOMICS  OF  BUSINESS 

obtains  his  title  to  a  work  from  an  author,  and  to  ex- 
ecutors, administrators  or  assigns  of  authors  and  pro- 
prietors. 

According  to  the  provisions  of  the  copyright  act  any 
person  qualified  may  have  the  exclusive  right  to  print, 
reprint,  publish,  copy  and  sell  a  copyrighted  work; 
Privfleges  translate  the  work  into  other  languages; 
by  copy-  dramatize  it;  convert  it  into  a  novel  or 
right.  other  non-dramatic  work  if  it  be  a  drama; 

arrange  or  adapt  it,  if  it  be  a  musical  work;  com- 
plete, execute  and  finish  it,  if  it  be  a  model  or  design  for 
a  work  of  art;  deliver  or  authorize  the  delivery  of 
lectures,  addresses  or  sermons;  perform  or  represent 
a  drama  publicly;  sell  any  manuscript  or  any  record 
of  a  dramatic  work  if  not  reproduced  for  sale  or  to  make 
or  procure  the  making  of  any  transcription  or  record  of 
the  same  by  or  from  which  it  may  in  any  manner  or  by 
any  method  be  exhibited,  performed  or  produced ;  ex- 
hibit, perform  or  produce  any  unpublished  dramatic 
work  in  any  manner  or  by  any  method;  and  perform 
for  profit  any  musical  composition  or  make  any  ar- 
rangement, setting  or  record  of  the  same. 

The  following  classes  of  work  are  subject  to  copyright : 
—  all  printed  Hterary  works  published  in  the  shape  of  a 
Productions  ^^^K  pamphlet,  leaflet,  card  or  single  page, 
subject  to  This  class  includes  tabulated  forms  of  infor- 
^^^  '  mation,  tables  of  figures  showing  the  result 
of  mathematical  computation,  single  poems,  songs  when 
pubHshed  without  music,  librettos,  descriptions 
of  moving  pictures  or  spectacles,  directories, 
gazetteers,  encyclopedias,  catalogues,  circulars  or  folders 


TRADE   MARKS   AND   COPYRIGHTS        349 

containing  reading  matter  other  than  mere  price  lists, 
and  literary  contributions  to  periodicals  or  newspapers. 
It  does  not  include  blank  books  used  in  busi- 

,  Exceptions. 

ness,  directions  on  scales,  dials  or  other  in- 
struments, games,  labels  or  wrappers,  formulae  on  boxes 
or  bottles,  advertisements  or  advertising  catalogues, 
prefaces  to  books  not  entitled  to  copyright,  or  calendars. 
vlf  calendars  contain  reading  matter  or  pictures  subject 
to  copyright,  they  may  be  registered  either  as  books 
or  as  prints,  according  to  the  nature  of  the  matter. 
Newspapers,  magazines,  reviews,  serial  produc- 

1  .  1       It  .,.,,.  Periodicals. 

tions,  and  m  general,  all  periodical  hterature 
registered  as  second-class  mail  matter.     Lectures,  ser- 
mons, addresses  or  similar  productions  prepared  for  oral 
delivery  and  dramatic  compositions  written  in  Lectures 
form  of  dramas,  comedies,  musical  comedies,  dramatic 

^,  .         ,  .        and  musical 

operas,    or    operettas.      This    does   not  in-  composi- 
clude  dances,  ballets,  tableaux,  moving-picture  *^°°^' 
shows,  animal  shows,  sleight-of-hand  performances,  acro- 
batic or  circus  tricks,  descriptions  of  moving  pictures  or 
settings    for    the    same.     Musical    compositions    pub- 
lished as  either  vocal  or  instrumental,  with  or  without 
words.     AH  maps  produced  of  a  cartographical 
nature,  including  marine  charts,  but  exclud-  works  of 
ing  astrological  charts,  landscapes,  or  draw-  "** 
ings  of  regions  which  have  no  real  existence.     Works 
usually  called  fine  arts,  as  paintings,  drawings  Reproduc- 
and  sculpture.     Reproductions  of  works  of  art,  ^°rks^of 
as  engravings,  woodcuts,  etchings  or  casts,  pro-  art. 
duced  so  as  to  contain  in  themselves  an  artistic  element 
distinct  from  that  of  the  original  work  of  art.    All  draw- 


3SO  ECONOMICS  OF  BUSINESS 

ings  or  plastic  works  of  a  scientific  or  a  technical  nature 
Drawings       produced  as  diagrams  or  models  of  scientific  or 
of  a  scien-      technical  works,  architect's  plans,  designs  for 
c  na  ure.    gj^gj-g^y^g  ^god,  etc.    Photographs  made  from 
photographic  negatives  or  from  moving-picture  films,  but 
not  photogravures,  half-tones  or  other  photo- 
engravings.   All   prints   and   pictorial   illus- 
trations not  included  in  the  enumerated  classes  come 
imder  the  law,  but  not  mere  ornamental  scrolls,  bor- 
Printsand     ders,  ornamental  letters,  or  forms  of  type, 
uiusta^a-        Copyright  is  not  granted  to  puzzles,  games, 
tions.  toys,  rebuses,  badges,  buckles,  pins,  buttons, 

embroideries,    laces,    woven   fabrics,    novelties   of   any 
description,  or  post  cards.     The  pictures  on  post  cards 
may  be  registered  as  prints,  pictorial  illustrations,  or 
as  photographs,  while  the  text  matter  may 

Exceptions.     ,  -  ,  ,  .  , 

be  of  such  a  nature,  as  to  be  registered  as 
a  book.  Trade  marks  cannot  be  registered  in  the  copy- 
right office. 

Works  subject  to  copyright  are  divided  into  two  classes, 
unpublished  and  pubUshed.  The  first  includes  all  pro- 
ciassesof  ductions  which  at  the  time  of  registration 
ject^to^"^"  ^^2,ve  not  been  printed  or  reproduced  in  copies 
copyrights,  for  sale  or  public  distribution.  It  comprises : 
lectures,  sermons  and  addresses ;  dramatic  and  musical 
compositions ;  photographic  prints ;  works  of  art ;  and 
plastic  works.  In  the  case  of  lectures,  sermons,  ad- 
dresses, dramatic  and  musical  compositions,  one  type- 
written or  neatly  written  manuscript  of  the  entire  work, 
not  an  outline  or  epitome  bearing  the  title  of  the  work, 
must  be  sent  to  the  copyright  oflSce.     In  the  case  of 


TRADE   MARKS  AND   COPYRIGHTS        351 

works  of  art,  models  or  designs,  drawings,  or  plastic 
works,  a  photographic  reproduction,  and  with  photo- 
graphs, a  copy  of  a  positive  print,  must  be  deposited.  If 
an  unpublished  work  is  registered,  and  is  later  published, 
it  must  be  again  registered  in  the  same  manner  as  a 
published  work. 

The  first  step  in  securing  a  copyright  is  the  publica- 
tion of  the  work  with  the  copyright  notice  inscribed  in 
every  copy.     The  second  is  the  sending  to  the  steps 
copyright  office  of  two  complete  copies  of  the  J)f  sec^a 
best  edition  of  the  work  accompanied  by  an  copyright, 
application  for  registration  correctly  filled  out,  and  a 
money  order  for  the  legal  fee.     The  law  requires  the 
deposit  of  the  copies  without  unnecessary  delay. 

The  usual  form  of  notice  is  the  word  "Copyright" 
or  the  abbreviation  "Copr."  accompanied  by  the  name 
of  the  copyright  proprietor,  and  if  the  work  Form  of 
be  a  printed  Kterary,  musical,  or  dramatic  notice, 
production,  the  notice  must  contain  the  year  in  which 
the  copyright  is  secured.  In  the  case  of  maps,  photo- 
graphs, reproductions  of  works  of  art,  prints,  etc.,  the 
notice  may  consist  of  the  letter  C  inclosed  in  a  circle 
as  ©,  accompanied  by  the  initials,  mark,  monogram, 
or  symbol  of  the  proprietor,  but  it  is  required  that  the 
proprietor's  name  appear  on  some  accessible  part  of  the 
work.  The  notice  of  copyright  must  be  applied :  if 
a  book,  upon  its  title-page  or  the  page  immediately  fol- 
lowing; if  a  periodical,  either  upon  the  title-page  or 
upon  the  first  page  of  text  of  each  separate  number  or 
under  the  title  heading;  or  if  a  musical  work,  either 
upon  its  title-page  or  the  first  page  of  music.     One  notice 


352  ECONOMICS  OF  BUSINESS 

in  each  volume,  or  in  each  number,  if  a  periodical,  is 
sufficient. 

The  copyright  law  places  many  restrictions  upon  the 
printing  of  copyrighted  works.  All  books  in  the  Eng- 
lish language  to  be  copyrighted  must  be  printed  from 
Restrictions  ^VP^  ^^^  within  the  limits  of  the  United 
upon  the  States.  The  same  restriction  of  place  is 
of  copy-  required:  for  texts  of  books  produced  by 
nght books,  lithographic  or  photo-engraving  processes; 
for  illustrations  in  books  except  where  the  subjects 
represented  in  the  illustrations  are  located  in  foreign 
countries  and  illustrate  scientific  works  or  reproduce 
works  of  art ;  and  for  the  binding  of  all  books.  Books 
by  foreign  authors  in  any  language  other  than  Eng- 
lish, and  books  in  raised  characters  for  the  blind  are 
not  required  to  be  printed  or  bound  within  the  United 
States. 

Books  printed  abroad  in  the  English  language,  if 
registered  in  the  copyright  office,  within  thirty  days 
Ad  interim  after  publication,  may  be  granted  an  "ad 
copyright,  interim"  protection  of  thirty  days  from  date 
of  registration.  To  extend  the  period  of  protection  to 
the  full  copyright  term,  an  edition  of  the  work  must  be 
published  in  the  United  States  within  the  prescribed 
thirty  days. 

Application  for  registration  must  state  the  following 
facts,  without  which  no  registration  can  be  made :  the 
Facts  name  and  address  of  the  claimant  of  copy- 

STappU^  right;  the  nationahty  of  the  author  of  the 
cation.  work ;    the  title  of  the  work;    the  name  and 

address  of  the  person  to  whom  certificate  is  to  be  sent ; 


TRADE   MARKS   AND   COPYRIGHTS        353 

and,  with  a  published  work,  the  actual  date  (year, 
month,  and  day)  when  the  work  was  published.  It  is 
very  desirable  that  the  appHcation  should  state  for 
record  the  name  of  the  author.  If  the  work  is  pubHshed 
under  a  pseudonym  or  anonymously,  the  author's  name 
may  be  omitted.  Nationality  means  citizenship  and 
not  race.  A  subject  of  England  should  be  described  as 
.English.  An  alien  domiciled  in  the  United  States,  ap- 
plying for  copyright,  should  expressly  state  the  fact  in 
his  appHcation.  The  title  of  the  work,  the  name  of  the 
author  and  the  name  of  the  owner  of  the  copyright  should 
be  correctly  stated  in  the  appHcation  and  should  agree 
with  the  same  statements  made  in  the  work  itself. 
Various  appHcation  forms  are  furnished  on  request  by 
the  Copyright  Office  and  should  be  used  when  applying 
for  registration. 

All  books  by  American  authors  and  all  books  in  the 
EngHsh  language  must  have  the  appHcation  accom- 
panied by  an  affidavit  showing  the  following   ^^^    . 

1  ••  tii«i»  p   Affidavit, 

facts:    that  the  prmtmg  and  the  bmdmg  of 

the  work  was  performed  within  the  Hmits  of  the  United 
States,  naming  in  each  case  the  place  where  the  work 
was  done  and  the  estabHshment  doing  it;  Require- 
that  the  completion  of  the  printing  of  the  »»ents. 
work  was  on  a  stated  day ;  and  that  the  work  was  pub- 
Hshed on  a  given  date.     The  afiidavit  should  be  under 
seal,  and  may  be  given  before  any  officer  authorized  to 
administer  oaths  in  the  United  States,  and  Persons 
who  can  aflix  his  official  seal  to  the  instru-  ?o^kean 
ment.     It  may  be  made  by  the  person  claim-  affidavit, 
ing  the  copyright,  his  duly  authorized  agent  or  represent- 

2  A 


354  ECONOMICS  OF  BUSINESS 

ative  residing  in  the  United  States,  or  the  printer  who 
printed  the  book.  The  person  making  the  afl&davit 
must  state  in  what  capacity  he  is  acting.  A  foreign 
author  applying  for  registration  of  a  book  in  any  lan- 
guage except  English  is  not  required  to  make  any  affidavit. 
An  affidavit  for  a  book  in  the  English  language  printed 
abroad  and  registered  for  thirty  days'  copyright  protec- 
tion, need  not  be  filed,  until  the  extension  to  full  copyright 
term  is  sought.  The  affidavit  appHes  only  to  books. 
Punish-  If  any  person  in  order  to  obtain  registration  of 
fafs^affida-  ^  Copyright,  knowingly  makes  a  false  affidavit, 
▼its.  as  to  his  having  comphed  with  the  require- 

ments of  the  law,  he  is  guilty  of  a  misdemeanor,  and  upon 
conviction,  is  subject  to  a  fine  of  not  more  than  one 
thousand  dollars,  and  the  forfeiture  of  all  of  his  copy- 
right rights  and  privileges. 

Application  for  registration  of  periodicals  is  made 
in  the  same  manner  as  for  books,  but  an  affidavit  is 
Registra-  not  required.  A  separate  registration  is  re- 
**eri<^-  quired  for  each  number  of  a  periodical  pub- 
cais.  fished,  with  a  notice  of  copyright,  and  cannot 

be  made  until  after  pubfication.  If  special  registration 
is  sought  for  any  contribution  to  a  periodical,  one  copy 
of  the  periodical  containing  the  contribution  should  on 
pubfication  be  deposited  in  the  copyright  office.  A  clip- 
Re  'stra-  P^^S  of  the  contribution  does  not  fulfill  the 
tion  of  statute  requirement.     The  date  of  pubfication 

tions  t ""  of  a  periodical  should  be  stated  in  the  appfica- 
periodicais.  ^[q^  a,s  the  day  on  which  the  issue  is  first  placed 
on  sale,  or  pubficly  distributed.  This  may  be  earfier 
or  later  than  the  date  printed  on  the  title-page. 


TRADE   MARKS   AND   COPYRIGHTS        355 

An  ad  interim  application  may  be  secured  by  deposit- 
ing in  the  copyright  office  one  complete  copy  of  the  for- 
eign edition,  with  an  application  containing  a  request  for 
the  reservation,  and  a  money  order  for  one  Ad  interim 
dollar.      The  appKcation  should  state:    the  howob*?°°' 
name  and  the  nationality  of  the  author ;  the  tained. 
name  and  nationahty  of  the  copyright  claimant ;  and  the 
^exact  date  of  the  original  publication  abroad.    When- 
ever, within  the  thirty-day  period,  an  edition  is  made  in 
the  United  States,  and  two  copies  are  deposited,  the 
copyright  may  be  registered  like  any  other  book. 

All  mail  for  the  copyright  office  should  be  addressed 
to  the  ^'Register  of  Copyrights,  Library  of  Congress, 
Washington,  D.C."     Copyright    matter    for  copyright 
deposit  in  the  copyright  office  is  sent  by  post-  mail  sent 
masters  free  of  charge.     Receipts  for  copy- 
right matter  delivered  to  postmasters  may  be  secured 
on  request. 

A  fee  of  one  dollar  is  required  for  copyright  registra- 
tion, but  with  photographs  when  no  certificate  of  regis- 
tration is  required,  it  is  fifty  cents.  PubHshers  for  their 
own  convenience  often  deposit  a  sum  of  money  in  ad- 
vance against  which  each  registration  is  charged. 

A  copyright  secured  under  any  copyright  act  of  the 
United  States  may  be  assigned,  granted  or  mortgaged  by 
an  instrument  in  writing  signed  by  the  propri-   ^ggj 
etor  of  the  copyright.     An  assignment  should   ment  of 
be  recorded  in  the  copyright  office  within  three   ^°^^^ 
months  after  its  execution  in  the  United  States,  or  within 
six  months  after  its  execution  in  any  foreign  country,  in 
default  of  which  it  is  void  as  against  any  later  purchaser 


356  ECONOMICS  OF  BUSINESS 

or  mortgagee  for  a  valuable  consideration,  whose  assign- 
ment has  been  duly  recorded.  When  an  assignment  has 
been  recorded,  the  assignee  may  substitute  his  name  in  the 
Time  of  notice  of  copyright.  A  copyright  is  granted  for 
protection.  ^  period  of  twenty-eight  years,  and  is  subject 
Extension,  to  renewal  for  a  Hke  period.  The  appHcation 
for  renewal  and  extension  should  be  made  to  the  copyright 
office,  and  duly  registered  within  one  year  prior  to  the  ex- 
piration of  the  original  term  of  copyright.  If  the  copies 
required  by  law  are  not  promptly  deposited,  the  register 
of  copyrights  may  at  any  time  after  the  publication  of  the 
Punishment  work  require  the  proprietor  of  the  copyright 
of  books*is  ^^  deposit  them.  After  the  demand  has  been 
not  made,  made,  and  in  default  of  the  deposit  of  the 
copies  within  three  months,  from  any  part  of  the  United 
States  except  outlying  territorial  possessions,  or  within 
six  months  from  the  latter  or  from  a  foreign  country,  the 
proprietor  of  the  copyright  is  liable  to  a  fine  of  one  hun- 
dred dollars,  to  pay  the  Library  of  Congress  twice  the 
amount  of  the  retail  price  of  the  best  edition  of  the 
work,  and  to  have  his  copyright  declared  null  and 
void. 

Any  person  who  for  fraudulent  purposes  inserts  or  im- 
presses any  notice  of  copyright  as  required  by  law,  or 
words  of  the  same  purport  upon  any  copyrighted  article, 
Punishment  ^^  ^^^  fraudulent  intent,  removes  or  alters  the 
for  fraudu-  copyright  notice  upon  any  article  duly  copy- 
righted is  guilty  of  a  misdemeanor,  and  subject 
to  a  fine  of  not  less  than  one  hundred  dollars,  nor  more 
than  one  thousand  dollars.  Any  person  who  knowingly 
issues  or  sells  any  article  bearing  a  notice  of  United  States 


TRADE   MARKS   AND   COPYRIGHTS        357 

copyright  which  has  not  been  copyrighted  in  this  country, 
or  who  knowingly  imports  any  article  bearing  such 
notice  or  words  of  the  same  purport,  which  has  not  been 
copyrighted  in  this  country,  is  Hable  to  a  fine  of  one 
hundred  dollars. 

The  importation  is  prohibited  in  the  United  States 
of  any  work  bearing  a  false  notice  of  copyright  when 
V  there  is  no  existing  copyright  in  this  coun-  jn^portation 
try,  or  of  piratical  copies  of  any  work  copy-  of  piratical 
righted  in  the  United  States.  In  the  latter 
case,  the  prohibition  does  not  apply  to  works  in  raised 
characters  for  the  use  of  the  blind ;  to  a  foreign  newspaper 
or  magazine  unless  the  newspaper  or  magazine  contains 
copyright  matter  printed  or  reprinted  without  the  au- 
thority of  the  copyright  proprietor ;  to  authorized  editions 
of  books  in  foreign  languages ;  or  to  any  books  published 
abroad  with  the  sanction  of  the  authors  or  copyright 
proprietors,  when  imported  under  one  of  the  following 
circumstances :  for  individual  use  and  not  for  sale ;  by 
the  authority  or  for  the  use  of  the  United  States;  for 
the  use  of  educational  or  religious  institutions,  „ 

,  ,         .     .  iM         •  1  1         r  Exceptions. 

learned  societies  or  ubranes ;  when  they  form 
part  of  Hbraries  purchased  abroad  for  reHgious  or  educa- 
tional institutions ;  when  they  are  brought  in  as  personal 
baggage  and  not  intended  for  sale ;  or  when  the  copies 
are  not  to  be  used  to  violate  the  copyright  law. 

A  copyright  proprietor  is  protected  against  having 
his  copyrighted  work  reprinted  without  his  authority. 
The  word  piratical  is  used  to  designate  copies  Piratical 
without  proper  authorization.     The  question  "^oxks. 
of  infringement,  or  the  unauthorized  use  of  the  work  of 


3S8  ECONOMICS  OF  BUSINESS 

another  in  part  or  as  a  whole  is  forbidden  by  statute.  It 
Difficult  to  is  uncertain  as  to  the  extent  that  use  may  be 
fs^Siringe***  ^^^^  of  the  work  of  another,  and  not  infringe, 
ment.  The  court  generally  holds  that  there  must  be 

copying  of  a  large  part  of  the  whole.  As  to  the  meaning 
of  a  large  part,  it  is  difficult  to  say  what  constitutes 
an  infringement.  The  court  has  held  that  Hteral  repeti- 
tion is  not  essential,  but  that  infringement  includes  all 
the  various  means  in  which  matter  of  a  publication  may 
be  changed  or  imitated  to  disguise  the  original  source. 
Any  person  who  willfully  and  for  profit  infringes  any 
copyright,  or  who  knowingly  aids  such  infringement  is 
guilty  of  a  misdemeanor,  and  upon  conviction  is  subject 
to  imprisonment  for  a  term  not  exceeding  one  year,  or  a 
fine  of  not  less  than  one  hundred  dollars,  nor  more  than 
one  thousand  dollars,  or  both. 

The  circuit  or  district  courts  have  jurisdiction  over 
all  cases  arising  under  copyright  law.  From  the  circuit 
Federal  ^^  district  court  appeals  may  be  taken  to  the 
coiirts'  circuit  court  of  appeals,  and  thence  to  the 

o^rcopy-  supreme  court  of  the  United  States.  No 
right  cases,  criminal  proceedings  can  be  instituted  unless 
commenced  within  three  years  after  the  causes  of  action 
arise. 

QUESTIONS 

1.  What  is  a  trade  mark?    Give  its  purpose  and  origin. 

2.  What  are  the  advantages  of  registered  trade  marks? 
What  persons  may  register  trade  marks  ? 

3.  What  are  the  requirements  for  a  trade-mark  applica- 
tion? 


TRADE   MARKS   AND   COPYRIGHTS        359 

4.  What  are  the  restrictions  in  granting  trade  marks? 
Give  the  requisites  for  registration. 

5.  What  is  an  infringement  of  trade  mark?    What  is  the 
punishment  ? 

6.  What  legal  meanings  are  included  in  the  term  copy- 
right ?    What  is  the  basis  of  our  copyright  system  ? 

7.  What  are  the  privileges  conferred  by  copyright  ? 

8.  What  productions  are  subject  to  copyright  protection  ? 
^  What  are  the  exceptions  ? 

9.  What  must  be  done  to  obtain  a  copyright  for  an  un- 
published work  ?    What  for  a  published  work  ? 

10.  What  is  the  usual  form  of  notice?  Where  should 
it  be  applied  ? 

11.  What  are  the  restrictions  placed  upon  the  production 
of  copyright  books  ? 

12.  What  is  an  ad  interim  copyright?  Give  its  purpose. 
How  may  it  be  changed  to  a  regular  copyright  ? 

13.  What  facts  must  be  stated  in  application  for  copy- 
right ?    What  is  an  afl&davit  ? 

14.  What  is  a  fraudulent  notice?  What  is  the  punish- 
ment? 

15.  What  is  an  infringement  of  copyright?  What  is  the 
punishment  ? 

REFERENCES 

B.  Singer,  "Patent  and  Trade  Marks  Laws  of  the  World"  ; 
J.  Walter  Thompson  Company,  "Things  to  Know  About 
Trade  Marks";  K.  R.  Swan,  "Patents,  Designs  and  Trade 
Marks";  N.  F.  Hesseltine,  "Law  of  Trade  Marks  and  Un- 
fair Trade";  R.  J.  Frank,  "Science  of  Organization  and 
Business  Development,"  Ch.  V;  E.  R.  Newell,  "Patents, 
Copyrights  and  Trade  Marks";  P.  T.  Cherington,  "Ad- 
vertising as  a  Business  Force,"  Ch.  XI;   R.  R.  Bowker, 


36o  ECONOMICS  OF  BUSINESS 

"Copyright,  Its  History  and  Its  Law";  Copyright  Office 
Bulletins,  Nos.  i,  2,  3,  5,  6,  7,  8,  9,  11,  13,  14,  15;  E.  L. 
MacGillivray,  "Treatise  upon  the  Law  of  Copyright"; 
United  States  Statutes  concerning  the  registration  of  trade 
marks  with  the  rules  of  the  Patent  Office  relating  thereto, 
1909  ;  "  Business  Administration,"  edited  by  W.  D.  Moody, 
Vol.  X,  Ch.  XVI. 


CHAPTER  XVI 

PATENTS,   TRADE  NAMES,   AND  TRADE   SECRETS 

The  Constitution  gives  to  Congress  the  power  to 
promote  the  sciences  and  useful    arts    by    giving  to 
authors  and  inventors,  for  limited  terms  of  Congress 
years,  the  exclusive  right  to  their  respective  oyer^°^®' 
writings  and  discoveries.     Congress  has,  in  patents, 
accordance  with  this  power,  enacted  certain  laws  and 
established  the  Patent  Ofl&ce. 

An  inventor  has  no  natural  right  to  the  exclusive  con- 
trol of  his  invention.    This  is  given  by  law,  p        . 
as  a  reward  for  his  ingenuity,  and  as  an  induce-  reward  for 
ment  to  encourage  all  to  make  discoveries.  "*^®^"**y- 
There  is  no  doubt,  but  what  the  inventive  talent  in  the 
United  States  has  been  stimulated  by  the  hberal  reward 
awaiting  the  successful.     The  government  in  giving  a 
patent  enters  into  a  contract  with  the  inventor,  that  in 
return  for  giving  his  discovery  to  the  public  at  the  end 
of  a  certain  period,  the  government  gives  him  the  exclu- 
sive control  of  his  patent  during  that  time,  and  protects 
him  in  this  exclusive  right  against  all  others. 

An  invention  to  be  protected  by  a  patent  must  not  only 
be  capable  of  being  used  but  its  use  must  con-  invention 
fer  a  benefit  on  mankind.     The  benefit  must  be  ^^"st  confer 
present  but  the  law  is  fulfilled  if  it  is  indirect  on  man- 
and  slight.     If  a  discovery  is  immoral,  or  its  ^°^^' 
use  is  only  for  illegal  purposes,  it  is  not  subject  to  patent. 

361 


362  ECONOMICS  OF  BUSINESS 

An  invention  is  not  complete  until  it  has  been  put  in 
actual  practice.  The  thinking  out  of  a  discovery  in 
To  be  com-  ^^^  ^^^  details,  minutely  describing  it  to  another 
piete  must  person,  or  reducing  it  to  a  drawing  does  not 
actual  *°  °  make  it  complete.  There  is  no  proof  that  the 
practice.  discovery  is  workable,  it  may  prove  a  decided 
failure.  Until  the  invention  is  operative,  nothing  has 
been  produced  that  confers  a  benefit  on  mankind.  The 
inventive  art  is  complete  when  an  inventor  has  success- 
fully put  his  discovery  into  operation. 

When  an  inventor  has  carefully  thought  out  all  the 
details  of  his  discovery,  and  nothing  remains,  but  putting 
Conceived  it  into  Concrete  form,  he  has  conceived  the  in- 
invention.  yention.  It  takes  some  time  to  reduce  a 
conceived  invention  to  concrete  form.  The  law  allows 
an  inventor  to  take  his  date  of  conception,  as  the  date 
of  his  invention.  But  the  law  insists  that  the  inven- 
tor shall  show  that  he  has  not  abandoned  his  idea,  and 
has  been  diKgent  in  seeking  to  put  it  into  practice.  The 
reduction  to  practice  does  not  mean  that  the  concrete 
form  must  be  perfect,  it  may  be  rudely  constructed,  but 
it  must  accomplish  to  a  reasonable  extent,  the  purpose 
for  which  it  is  intended.  If  two  persons  lay  claim  to 
the  same  discovery,  the  important  question  for  the 
Commissioner  of  Patents  to  decide  is  that  of  priority. 
The  date  of  the  conceived  invention,  if  properly  verified, 
will  be  accepted  as  necessary  proof  of  priority.  It  is 
essential  that  every  inventor  not  only  note  the  date  of  his 
conceived  invention,  but  verify  the  date,  by  statement  in 
a  diary  or  a  drawing  witnessed  by  a  second  person. 

A  patent  may  be  obtained  by  any  person  who  has  in- 


PATENTS,  TRADE   NAMES,  AND   SECRETS     363 

vented  any  new  and  useful  art,  machine,  manufacture, 
composition  of  matter,  or  any  new  and  useful  improve- 
ment of  either,  provided  that  it  is  not  known,  . 
used  by  others,   sold,   or  described  in  any  mentsfor 
printed  pubhcation  in  this  or  in  any  foreign  *  ^**®^ ' 
country  during  a  period  of  two  years  previous  to  his 
application,  and  that  it  is  not  patented  in  any  foreign 
country  on  an  application  filed  more  than  twelve  months 
before  his,  unless  the  invention  is  proved  to  have  been 
abandoned  by  the  actual  discoverer. 

If  it  is  proven  that  the  inventor  at  the  time  of  making 
his  application  beHeved  himself  to  be  the  first  inventor, 
a  patent  will  not  be  refused  on  account  of  the  importance 
invention,  or  any  part  thereof,  having  been  tion^^fdfs"- 
known  or  used  in  any  foreign  country  before  his  covery. 
invention,  provided  that  it  was  not  patented  on  an 
application  filed  more  than  twelve  months  before  his,  or 
described  in  any  printed  publication.     The  receipt  of 
letters  patent   from   a    foreign    government  will  not 
prevent  the  inventor  from  obtaining  a  patent  in  the 
United  States  unless  the  application  on  which  the  foreign 
patent  was  granted  was  filed  more  than  twelve  months 
prior  to  the  filing  of  the  appHcation  in  this  country. 
If  so,  the  patent  will  be  refused. 

The  appKcant  for  a  patent  must  if  alive  and  not  insane 
be  the  inventor  of  what  is  sought  to  be  patented.     If  a 
person  becomes  insane  after  having  made  an  Persons 
invention,  his  guardian  or  legal  representative  a^^e*^ 
may  apply  for  the  patent.     In  case  of  the  death  patents, 
of  an  inventor,  his  executor  or  administrator  may  make 
appHcation  and  obtain  the  patent.    A  minor  or  a  married 


364  ECONOMICS  OF  BUSINESS 

woman  may  be  granted  a  patent.  The  protection  of  the 
patent  law  is  extended  to  foreigners  as  well  as  to  citizens 
of  the  United  States. 

An  application  for  a  patent  must  be  made  to  the 

Commissioner  of  Patents,  and  be  signed  by  the  inventor, 

if  alive,  or  his  executor  or  administrator,  if 

dead.    A  complete  application  comprises  a  fee 

of  fifteen  dollars,  a  petition,  a  specification  and  oath, 

drawings,  and  a  specimen  when  required.     The  petition, 

specification  and  oath  must  be  in  the  Enghsh 

Essentials.      .  .   •,  ,  .  ,  , 

language.  All  papers  which  are  to  become  a 
part  of  the  permanent  records  of  the  office  must  be 
legibly  written  or  printed  in  permanent  ink. 

The  petition  is  addressed  to  the  Commissioner  of 
Patents,  and  must  state  the  name,  residence,  and  post- 
office  address  of  the  petitioner,  name  by  title 
the  invention  sought  to  be  patented,  make  a 
reference  to  the  specification  for  a  full  description  of 
such  invention,  and  be  signed  by  the  appHcant. 

The  specification  is  a  written  description  of  the  in- 
vention or  discovery,  the  process  of  making,  constructing 
or  compounding  it,  and  its  manner  of  use.  It  is  required 
Specifica-  to  be  stated  in  clear,  concise  and  exact 
^^^'  terms,  so  as  to  enable  any  person  skilled  in  the 

art  or  science  to  which  the  invention  or  the  discovery 
belongs,  or  with  which  it  is  most  nearly  connected,  to 
make,  construct  or  compound  and  use  it.  The  speci- 
fication must  clearly  and  precisely  explain  the  invention 
for  which  the  patent  is  sought,  and  explain  it 

Essentials.      ,  ,  ,        i .   , .         •  i      • .    r 

m  such  a  manner  as  to  distinguish  it  from 
other  inventions.     If  it  is  an  improvement,  the  specifi- 


PATENTS,   TRADE  NAMES   AND   SECRETS    365 

cation  must  clearly  point  out  the  parts  to  which  the 
improvement  relates,  and  must  by  explicit  language  dis- 
tinguish between  what  is  old  and  what  is  claimed  as  new. 
The  claims  of  the  inventor  must  be  so  stated  that  a 
broad  construction  can  be  placed  upon  them.    A  patent 
is  of  little  value  if  another  person  can,  in  claims  of 
spite  of  it,  by  a  slight  variation  of  the  article  inventor 
patented,  make  it.     The  application  writer 
should  bear  in  mind,  that  a  most  important  matter  of 
consideration,  is  the  interpretation  placed    upon    the 
wording    of    the    specification    by    the    courts.     Fre- 
quently a  patent  has  been  rendered  practically  value- 
less by  the  use  of  some  term  which  correctly  described 
the   invention,    but    the   interpretation    of    the    court 
narrowed  its  scope.     Extreme  care  should  be  taken  that 
the  specification  so  broadly  explains  the  claims  that 
it  embodies  not  only  what  is  claimed  in  the  drawings,  but 
also  as  many  variations  as  possible.     The  rights  of  an 
inventor  depend  upon  the  claims  in  his  patent  according 
to  their  proper  construction,  and  not  upon  what  he 
erroneously  supposes  it  to   cover.     The  specifications 
must  clearly  disclose  every  essential  element  of  Every 
the  invention  or  the  patent  will  be  void.     Any  essential 
part  not  disclosed  in  the  application  as  first  must  be 
filed  cannot  later  be  legally  inserted.     But  ^ecS'"" 
matter  not  completely  disclosed  may  be  later  *^o^- 
fully  explained  by  an  amendment  with  a  supplemental 
oath,  provided  that  it  was  invented  by  the  applicant 
before  his  application  was  filed.     A  patent  is  void  if 
the  patentee,  for  the  purpose  of  deceiving  the  pubHc, 
discloses  more  or  less  than  his  real  invention. 


366  ECONOMICS   OF   BUSINESS 

The  applicant  must  make  oath  or  affirmation  that 
he  does  believe  himself  to  be  the  original  or  first  inventor 
of  that  for  which  he  soUcits  a  patent,  and  that 
he  does  not  know  and  does  not  beheve  that 
the  same  was  ever  before  known  or  used.     He  must  also 
state  of  what  country  he  is  a  citizen,  and  his  place  of 
residence. 
The  applicant  must  furnish  a  drawing  of  his  inven- 
tion whenever  it  is  capable  of  illustration. 
The  drawing  must  show  every  feature  of  the  in- 
vention covered  by  the  claims. 

A  model  is  only  required  when  the  primary  examiner, 
on  examination  of  the  case  in  its  regular  order,  finds 
it  necessary  or  useful.  In  such  cases,  if  a 
model  has  not  been  furnished,  the  examiner, 
notifies  the  appUcant  of  such  requirement.  When  a 
model  is  required,  the  examination  is  suspended  until 
it  is  received  and  filed.  It  should  clearly  exhibit  every 
feature  of  the  machine  which  forms  the  subject  of  a 
claim  of  invention,  but  should  not  include  other  matter 
than  that  covered  by  the  actual  invention  or  improve- 
ment, unless  it  be  necessary  for  exhibition  of  the  in- 
vention in  a  working  model.  The  model  should  be 
neatly  and  substantially  made  of  durable  material, 
metal  being  preferable,  but  when  the  material  forms  an 
essential  feature  of  the  invention,  the  model  should  be 
constructed  of  that  material.  The  model  must  not  be 
more  than  one  foot  in  length,  width  or  height,  except 
in  cases  where  the  Commissioner  admits  working  models 
of  complicated  machines  of  larger  dimensions. 

An  interference  is  a  proceeding  for  the  purpose  of 


PATENTS,   TRADE   NAMES   AND   SECRETS     367 

determining  the  priority  of  an  invention  between  two 
parties  claiming  the  right  to  obtain  a  patent  inter- 
ior practically  the  same  invention.  The  Terence, 
obtaining  of  a  patent  on  the  invention  in  dispute  by  one 
of  the  parties  will  not  prevent  an  interference.  The 
Commissioner  of  Patents  has  not  the  right  to  cancel  a 
patent,  but  may  grant  a  second  patent  for  the  same  in- 
vention, and  leave  the  settlement  of  the  question  of 
priority  to  the  courts. 

When  a  notice  of  interference  is  received  at  the  Patent 
Office,  the  examiner  of  interferences  makes  a  careful 
examination.     If  the  issue  between  the  parties  procedure 
is  not  clearly  defined,   he  refers  it  to  the  after  notice 

of  interfer- 

primary  examiner  who  decides  whether  or  not  ence  is 
the  notice  should  be  amended.     When  a  dis-  ^^"i^®*^- 
agreement  arises  between  the  two  examiners,  the  matter 
is  referred  to  the  Commissioner  for  settlement.     During 
the  preliminary  proceedings,  the  primary  examiner  has 
jurisdiction  of  the  case.     The  issue  must  be 
clearly  defined ;  the  invention  must  be  decided  nary  pro- 
to  be  patentable;  and  the  claims  of  the  re-  <^®®^^^8s. 
spective  parties  must  be  put  in  such  condition,  that 
they  will  not  require  alteration  after  the  interference 
has  been  finally  decided,  unless  the  testimony  brought 
forth  in  the  trial  justifies  a  change.    When  an  interference 
is  found  to  exist,  the  examiner  of  interferences  names  the 
time  for  fifing  the  preHminary  statements  and  declares  the 
interference  by  sending  notices  to  the  different  parties 
concerned.     The  jurisdiction  of  the  case  now  passes  to 
the  examiner  of  interferences.     The  preHminary  state- 
ment, which  must  be  filed  by  each  party,  must  set  forth 


368  ECONOMICS  OF  BUSINESS 

under  oath  the  date  of  the  original  conception  of  the 
invention,  when  the  first  drawing  was  made,  when  the 
Preliminary  model  was  made,  the  date  of  the  disclosure 
statement,  ^f  ^j^g  invention  to  others,  when  it  was  re- 
duced to  practice,  and  a  statement  of  the  extent  to 
which  the  invention  had  been  used. 

After  the  preliminary  statements  have  been  filed  and 
approved,  they  are  open  for  inspection  by  the  contesting 
parties.  Thirty  days  are  allowed  for  making  motions 
Parti  ^^^  ^^^  filing  of  amendments.    The  party  who 

inter-  filed  his  apph'cation  is  considered  to  be  the  first 

erence.  inventor,  and  is  called  the  senior  party  or 
the  defendant,  while  the  later  applicant  is  known  as 
the  junior  party  or  the  plaintiff.  Dates  are  set  for 
the  taking  of  afl&davits,  the  junior  party  first,  then  the 
senior  party,  and  finally  the  junior  party  in  rebuttal. 
The  witnesses  are  examined  as  in  an  ordinary  court  of 
law.  When  the  testimony  is  complete,  the  case  is 
argued  before  the  examiner  of  interferences,  and  he 
gives  a  decision,  giving  priority  to  one  or  the  other  of 
the  parties.  An  appeal  may,  upon  the  pay- 
ment of  ten  dollars,  be  taken  to  the  examiners- 
in-chief,  a  board  of  three  judges,  and  an  adverse  decision 
by  them  may,  with  the  payment  of  twenty  dollars,  be 
taken  to  the  Commissioner.  An  appeal  from  the  Com- 
missioner's decision  may  be  taken  within  forty  days  to 
the  court  of  appeals  of  the  District  of  Columbia.  The 
case  in  this  instance  is  decided  upon  the  record  as  sent 
from  the  Patent  Office.  The  fee  for  this  appeal  is  fifteen 
dollars.  If  the  decision  of  the  court  is  adverse,  a  bill  in 
equity  may  be  filed  to  compel  the  granting  of  the  patent. 


PATENTS,   TRADE  NAMES   AND   SECRETS     369 

A  patent  gives  a  protection  for  a  period  of  seventeen 
years.     A  person  has  not  the  exclusive  right  to  his  in- 
vention until  he  receives  a  patent,  and  con-  Time  of 
sequently  cannot  recover  damages  for  infringe-  patent, 
ment  prior  to  the  date  of  his  patent.    A  patent  cannot 
be  extended  except  by  act  of  Congress.     The  govern- 
ment does  not  guarantee  the  validity  of  a  patent  nor 
its  priority.     Such  matters  are  settled  by  the  courts.     In 
this  country,  taxes  are  not  levied  on  a  patent,  Foreign 
nor  is  its  owner  compelled  to  operate  it.     It  pa*©^*^. 
is  not  necessary  for  the  owner  of  a  patent  to  put  it  in 
operation  during  the  period  of  its  existence.    The  ma- 
jority of  foreign  countries  levy  taxes  on  all  patents,  and 
compel  the  owners  to  work  or  operate  them.     If  the 
patent  is  not  operated,  the  owner  abandons  it,  and  the 
people  are  entitled  to  its  benefit,  and  are  allowed  to  use  it. 

A  patent  gives  to  its  owner  the  exclusive  right  to  make, 
use  and  sell  the  patented  invention  throughout  the  United 
States  and  territories.  The  production,  use  infnnge- 
and  sale  of  the  patented  invention  without  °*®°*- 
the  consent  of  its  owner  is  an  infringement  and  illegal. 
The  infringement  of  any  part  is  an  infringement  of  the 
patented  invention.  The  United  States,  a  state,  or  a 
municipaHty  cannot  infringe  a  patent. 

A  person  owning  a  patented  machine  has  a  right  to 
keep  the  same  in  working  condition  by  repairs.     If  a  part 
wears  out  or  is  broken,  he  may  usually  make  -^^^^  ^^ 
the  part,  but  cannot  construct  a  new  machine.   J^^ep 
No  definite  rule  can  be  stated  dividing  legiti-  machine  in 
mate  repair  and  illegal  construction,  but  each  ^^^^' 
case  must  be  decided  on  its  particular  circumstances. 


370  ECONOMICS  OF  BUSINESS 

To  constitute  an  infringement,  it  is  not  necessary,  that 
the  identical  device  given  in  the  patent  drawings  be 
What  used.    The  substitution  of  anything  which 

an^hSriBge-  accomplishes  substantially  the  same  result, 
ment?  in  practically  the  same  way,  and  was  known  as 

a  proper  substitute  at  the  time  the  invention  was  made, 
is  usually  an  infringement. 

Frequently  it  is  advisable  to  have  a  search  made  by 
a  competent  person  through  the  patents  in  the  Patent 
Office  to  find  if  an  invention  infringes  any  other.  This 
Patent  occurs  usually  when  a  person  wishes  to  pro- 

search.  ^yj^QQ  a.  certain  invention,  and  wishes  to  pro- 
tect himself  against  later  charges  of  infringement. 
The  search  may  assure  the  manufacturer  that  his  in- 
vention does  not  infringe  any  prior  patent,  and  that  he 
is  free  from  a  possible  suit  for  infringement. 

^^^'  If  a  patent  is  found  which  covers  his  inven- 
tion, it  may  be  possible  to  change  his  device  so  that  it 
will  not  infringe.  Upon  the  failure  to  do  this,  the  only 
recourse  is  to  buy  the  patent,  or  obtain  a  license  to  pro- 
duce or  use  it. 

The  Constitution  gives  to  the  United  States  courts 
jurisdiction  in  patent  suits.  As  soon  as  a  person  learns 
United  that  his  patent  is  being  infringed,  he  notifies 

states  j^i^Q  infringer  in  writing  to  cease  violating  his 

jurisdiction       .  /^ ....  -  ,  i    . 

over  patent    right.     If  the  mfnnger  refuses,  the  complam- 

^^*®*  ant  usually  goes  to  the  court,  and  asks  for  a 

preliminary  injunction.     This  is  not  granted  unless  the 

complainant  proves  to  the  court's  satisfaction, 

junction.     ^^^^  ^^  ^^^  ^^^  ^.^^^  ^^  ^^^  patent,  that  the 

patent  is  valid,  and  that  the  defendant  has  infringed.  The 


PATENTS,   TRADE   NAMES   AND   SECRETS     371 

injunction  if  obtained  forbids  the  infringer  from  using 
the  patent  until  the  decision  of  the  suit. 

The  evidence  is  usually  taken  before  a  master  appointed 
by  the  court.  Witnesses  can  be  subpoenaed  to  attend. 
When  all  the  testimony  is  taken,  it  is  printed.  Procedure 
and  the  case  is  argued  before  the  court.  If  a  j^rfnge?^ 
decision  is  given  in  favor  of  the  complainant,  nient. 
the  decree  usually  sustains  the  vaHdity  of  the  patent  and 
awards  a  perpetual  injunction  against  the  infringer.  If 
the  complainant  has  asked  for  profits,  damages  or  both, 
the  matter  is  usually  referred  to  a  master  who  investi- 
gates and  reports  to  the  court,  the  amount  of  profits 
and  damages  found.  The  court  makes  a  final  decree 
which  may  include  profits,  damages  or  both,  as  well  as 
the  injunction.  The  court  has  the  power  to  increase 
the  amount  of  damages  found  to  any  sum  not  exceeding 
three  times  the  amount  of  the  actual  damages.  If  the 
decision  is  in  favor  of  the  infringer,  the  case  is  dismissed. 
The  court  uses  its  discretion  in  awarding  costs.  From 
the  final  decree,  an  appeal  may  be  taken  to  the  circuit 
court  of  appeals  of  the  District  of  Columbia. 

A  person  seUing  a  patented  article  should  give  due 
notice  to  the  public  that  it  is  patented.     This  is  usually 
done  by  attaching  to  the  article,  the  word  nfotjcesfor 
*' Patented,"  together  with  the  day  and  year,  patented 
the  patent  was  granted.     Where  it  is  impracti- 
cable to  attach  the  notice  to  the  article,  it  may  be  afiixed 
by  label  either  to  the  article,  or  to  a  package  containing 
one  or  more  of  the  articles.     In  a  suit  for  damages  as  a 
result  of  an  infringement,  a  person  faiHng  to  give  notice 
by  properly  marking  his  articles  cannot  recover  damages, 


372  ECONOMICS  OF  BUSINESS 

unless  he  gives  proof  that  the  defendant  was  duly  noti- 
fied of  the  infringement,  and  continued  after  such  notice 
to  make,  use,  or  sell  the  article  patented. 

The  law  is  very  strict  against  any  fraudulent  use  of  pat- 
ent marking.  It  forbids  any  person  marking  upon  any- 
thing made,  used  or  sold  by  him,  for  which  he  has  not  a  pat- 
Fraudulent  ent,  the  name  or  any  imitation  of  the  name  of 
patent  ^"^^  pcrson  who  has  a  patent  therefor,  without 

marking.  the  consent  of  the  patentee  or  his  legal  repre- 
sentative. The  word  ''Patent"  or  "Patented"  or  the 
words  **  Letters  Patent"  must  not  be  affixed  to  any  pat- 
ented article  unless  by  the  patentee,  or  with  his  consent,  or 
that  of  his  legal  representatives.  The  word  "  Patent "  or 
any  word  or  words  implying  that  an  article  is  patented 
must  not  be  afl&xed  to  any  unpatented  articles.  A  per- 
son guilty  of  any  of  the  above  offenses  is  subject  to  a  fine 
of  not  less  than  one  hundred  dollars  with  costs. 

A  patent  is  property  and  can  be  sold,  transferred  by 
gift  or  bequeathed  or  mortgaged  like  any  other  property. 
Patent  is  The  assignment  of  a  patent  transfers  the  ex- 
property,  elusive  right  to  it.  A  person  may,  by  grant, 
transfer  the  exclusive  right  to  make,  use  and  sell  under 
the  patent  within  some  specified  district,  as  in  one  state, 
or  he  may  by  Ucense  transfer  the  right  to  make  alone,  to 
make  and  sell,  or  to  make,  use  and  sell  under  the  patent. 

The  Patent  Office  notifies  an  appHcant  if  his  claim  is 
rejected,  states  fully  the  reasons  for  this  action,  and  fur- 
Rejection  nishes  such  information  and  references  as  may 
of  claim.  j^g  useful  in  aiding  the  appHcant  to  judge  of 
the  advisabihty  of  prosecuting  his  application,  or  of 
altering  his   specifications.     If,  after   receiving  notice. 


PATENTS,  TRADE   NAMES   AND   SECRETS     373 

an  applicant  presents  his  claim  with  or  without  altering 
his  specification,  the  application  is  reexamined.  If, 
upon  reexamination,  the  claim  is  again  rejected,  the 
reasons  must  be  fully  and  precisely  stated. 

The  appHcant  has  the  right  to  amend  before  or  after 
the  first  rejection,  and  may  amend  as  often  as  the  ex- 
aminer presents  new  references  or  reasons  for  rejection. 
In  an  amendment,  the  apphcant  should  clearly  point  out 
all  the  patentable  novelty,  which  he  thinks  the  case 
presents,  in  view  of  what  is  shown  by  the  references 
cited,  or  the  objections  made.  He  should  also  show 
how  the  amendments  avoid  such  references  or  objections. 

When  an  application  has  been  twice  rejected,  for  the 
same  reasons  upon  grounds  involving  the  merits  of  the 
invention,  or  when  amended,  for  want  of  iden- 

,  Appeals. 

tity  with  the  invention  originally  disclosed, 
or  because  the  amendment  involves  a  departure  from 
that  originally  presented,  the  applicant  may,  upon 
payment  of  a  fee  of  ten  dollars,  appeal  from  the  decision 
of  the  primary  examiner  to  the  examiners-in-chief. 
Upon  the  fihng  of  the  appeal,  it  is  submitted  to  the  pri- 
mary examiner,  who  will,  if  it  is  found  regular  in  form, 
furnish  the  examiners-in-chief  with  a  written  statement 
of  the  grounds  for  his  decision  on  all  points  involved 
in  the  appeal,  with  copies  of  the  rejected  claim,  and  with 
the  references  appHcable  thereto.  From  their  adverse 
decisions,  appeals  may,  with  the  payment  of  proper  fees, 
be  taken  as  in  interferences,  to  the  Commissioner,  and 
then  to  the  court  of  appeals  of  the  District  of  Columbia. 
An  abandoned  application  is  one  which  has  not  been 
completed,  and  prepared  for  examination  within  one  year 


374  ECONOMICS  OF  BUSINESS 

after  the  filing  of  the  petition,  or  which  the  appKcant  has 
failed  to  prosecute  within  one  year  after  the  date,  when 
the  last  official  notice  of  any  action  of  the  office  was 
Abandon-  mailed  to  him.  An  applicant  may  expressly 
™®^*-  abandon  his  apphcation  by  filing  at  the  office 

a  written  declaration  of  abandonment.  The  prosecution 
of  an  apphcation  to  save  it  from  abandonment  must 
include  such  proper  action  as  the  condition  of  the  case 
may  require.  Before  an  application  abandoned  by  fail- 
ure to  complete  or  prosecute  can  be  revived  as  a  pend- 
ing application  it  must  be  shown  to  the  satisfaction  of 
the  Commissioner,  that  the  delay  in  its  prosecution  was 
unavoidable.  When  a  new  apphcation  is  filed  in  place 
of  an  abandoned  or  rejected  one,  a  new  petition,  speci- 
fication, oath,  drawing  and  fee  are  required,  but  the  old 
model,  if  suitable,  may  be  used. 

A  forfeited  apphcation  is  one  upon  which  a  patent 
has  been  withheld  for  failure  to  pay  the  final  fee  within 
Forfeited  the  prescribed  time.  When  a  patent  has  been 
appUcation.  -yj^thheld  because  of  the  non-payment  of  the 
final  fee,  any  person,  whether  inventor  or  assignee  who 
has  an  interest  in  the  invention,  may  file  a  renewal  of 
the  apphcation  for  the  same  invention.  The  second  ap- 
phcation must  be  made  within  two  years  after  the  allow- 
ance of  the  original  apphcation. 

Two  persons  are  joint  inventors  if,  by  mutually  work- 
ing together  and  mutually  contributing  ideas,  they  make 
Joint  a  discovery.     They  are  entitled  to  a  joint 

inventors,  patent.  Neither  can  obtain  a  patent  for  an 
invention  jointly  invented  by  them.  Independent  in- 
ventors of  distinct  and  independent  improvements  in 


PATENTS,   TRADE  NAMES  AND   SECRETS     375 

the  same  machine  cannot  obtain  a  joint  patent  for  their 
separate  inventions.  If  one  person  furnishes  the  capital 
and  another  makes  the  invention,  they  cannot  make 
appHcation  as  joint  inventors.  In  this  case,  the  inventor 
can  make  an  assignment  of  an  undivided  part  interest 
to  the  one  who  supplied  the  capital,  and  upon  request, 
the  patent  will  be  issued  jointly  to  the  inventor  and  the 
assignee. 

A  design  patent  may  be  obtained  by  any  person  who, 
by  his  own  industry,  genius  and  expense,  has  invented 
any  new  and  ornamental  design  for  an  article  Design 
of  manufacture  not  known,  or  used  by  others  Patents, 
before  his  invention,  or  patented,  or  described  in  any 
printed  pubKcation.     The  prerequisites  for  obtaining  an 
ordinary  patent  usually  apply  to  designs.     A  design  to 
be  patentable  must  be  more  than  mere  mechanical  skill. 
Any  person  who  infringes  a  patented  design  is  infringe- 
liable  to  a  fine  not  exceeding  two  hundred  °^®°** 
and  fifty  dollars.     If  the  profits  awarded  exceed  that 
amount,  he  is  also  entitled  to  the  excess.     Damages  and 
an  injunction  may  also  be  awarded.     Design  patents 
are  given,  at  the  option  of  the  appHcant,  for  three  and 
a  half,  seven,  or  fourteen  years.     The  fee  is  respectively 
ten,  fifteen,  or  thirty  dollars.     The  practice  as  to  designs, 
in  general,  follows  very  closely  that  for  patents,  and 
nearly  all  the  regulations  and  provisions  which  apply  to 
the  latter  apply  also  to  the  former. 

A  trade  name  is  the  name  under  which  a  business  is 
carried  on,  or  by  which  it  is  known  in  the  trade,  xrade 
People  come  to  regard  the  name  under  which  ^^ame. 
a  business  has  been  conducted  for  years,  as  an  assur- 


376  ECONOMICS  OF  BUSINESS 

ance  of  the  quality  of  the  article  bearing  it.  The  name 
When  pro-  ^^^^  becomes  a  valuable  asset,  and  the  owner 
tectedby  is  entitled  to  protection  from  an  unfair  use 
of  it.  Where  the  name  is  one  which  can  be 
exclusively  appropriated,  the  court  protects  the  owner 
from  any  infringement,  but  where  the  name  is  descrip- 
tive or  a  geographical  term,  or  one  which  others  have  an 
equal  right  to  use,  the  court  only  interferes  to  prevent 
imfair  competition  in  business. 

A  trade  name  differs  from  a  trade  mark  in  that  it  is 
not  afl&xed  to  a  commercial  article.  A  trade  name,  like 
Trade  name  ^^^^  ^^^  Taylor,  is  applied  to  a  business  where 
vs.  hundreds  of  articles  bearing  trade  marks  are 
sold.  The  name  of  a  business  may  at  the 
same  time  be  both  a  trade  name  and  a  trade  mark.  It 
may  be  the  name  of  a  business  undertaking,  or  point  out 
the  place  of  business.  This  makes  it  a  trade  name.  It 
may  be  afl&xed  to  the  article  produced  by  the  undertak- 
ing, and  it  may  then  become  a  trade  mark. 

The  simplest  form  of  a  trade  name  is  the  name  of  an 
individual  used  as  the  name  of  a  business.  The  name  by 
which  a  person  conducts  a  business  need  not  be  his 
christian  name  or  his  surname.  A  person  may  assume 
for  the  purposes  of  trade  any  name  not  prohibited  by 
law,  and  will  be  protected  in  its  use,  the  same  as  if  he  had 
The  choice  used  his  own  name.  If  a  person  assumes  an 
for*a^^^     arbitrary  or  fanciful  name  under  which  to  con- 


duct his  business,  he  may  acquire  the  exclusive 
right  to  its  use.  But  if  a  person  uses  his  own  name,  or  a 
selected  name,  he  cannot  exclude  another  person,  having 
the  same  name  from  using  it  honestly  and  in  good  faith 


PATENTS,  TRADE   NAMES  AND   SECRETS    377 

as  a  trade  name,  because  every  person  has  a  right  to  use 
his  own  name  in  the  conducting  of  his  business.    The 
use  of  one's  own  name  can  only  be  limited  when  such  a 
name  has  become  the  trade  name  of  another.  Limitations 
and  the  later  user  is  using  it  in  a  manner  to  upon  the 

use  of  a 

deceive  the  purchasers  or  defraud  the  party  person's 
who  made  it  valuable.  When  it  can  be  proven  ^^*™®* 
that  the  use  of  a  trade  name  is  unfair  to  the  former  user 
of  the  name,  the  court  interferes  and  prohibits  the  later 
user,  not  from  the  use  of  the  name,  but  from  using  it  in 
such  a  way  as  would  deceive  the  people.  Every  man  has 
a  right  to  use  his  own  name  in  his  business,  even  though 
he  may  thereby  interfere  with  or  injure  the  business  of 
another  person  bearing  the  same  name,  provided  he 
does  not  resort  to  any  scheme  or  artifice  to  produce  the 
impression  that  the  establishments  are  identical. 

The  name  of  a  place  where  a  business  is  located  usually 
constitutes  a  valid  trade  name.  It  is  immaterial  whether 
the  name  is  original  with  the  user,  or  had  been  used  in 
other  places  sufficiently  remote  so  that  no  conflict  oc- 
curs. Thus,  there  may  be  a  Columbia  Hotel  in  every 
town,  and  the  name  is  a  valid  trade  name  for  vaUd  trade 
every  one.  But  if  a  person  opens  a  hotel  in  a  ^a^^es. 
town  and  calls  it  the  Astor  House,  the  court  will  pro- 
tect him  in  his  trade  name  and  not  allow  any  person  to 
open  another  hotel  by  the  same  name  in  that  town. 
** Saratoga"  and  ''What  Cheer"  have  been  protected 
as  trade  names  for  restaurants,  "New  York  Dental 
Rooms,"  ''Mechanics'  Store,"  "Six  Little  Tailors," 
"Christy's  Minstrels"  are  cases  of  other  protected 
names. 


378  ECONOMICS  OF  BUSINESS 

Goodwill  is  the  advantage  or  the  benefit  which  comes 
to  a  business  by  reason  of  good  name,  reputation,  situa- 
tion or  connection.  The  probability  that  old  customers 
will  continue  to  patronize  a  business  in  conse- 
GoodwUi.  quence  of  the  way  in  which  the  business  had 
been  previously  conducted  is  often  a  valuable 
asset.  Goodwill  is  the  advantage  which  an  old  estab- 
lished business  has  over  a  new  business  at  its  first  start. 
However  extended  its  influence  may  be,  goodwill  is  worth 
Character-  nothing  unless  it  has  the  power  of  attrac- 
istics.  ^Jqj^  sufficient  to  bring  customers  to  the  busi- 

ness of  which  it  is  a  part.  Goodwill  has  no  separate, 
independent  existence,  and  no  meaning  unless  connected 
with  some  trade,  business,  or  calling.  Destroy  the  busi- 
ness unit  and  the  goodwill  is  destroyed,  though  some 
elements  may  remain,  which  may  be  gathered  together 
and  be  revived  again. 

Goodwill  was  formerly  held  as  closely  related  to  the 
place  where  the  business  was  conducted  rather  than  to 
Importance  the  business  itself.  Location  is  usually  a 
to  gwT^^^^  ^^^y  important  factor,  and  in  many  business 
wiu.  units  there  can  scarcely  be  any  goodwill  apart 

from  the  place  where  the  business  is  carried  on.  But 
where  the  reputation  of  the  business  is  widely  known,  and 
where  the  product  rather  than  the  place  of  production 
or  its  manufacturers  has  won  public  favor,  it  is  difficult 
to  locaHze  goodwill.  The  goodwill  of  a  magazine,  news- 
paper, or  widely  known  goods  are  good  examples.  With 
a  magazine  or  an  article  like  Coca-Cola,  it  is  immaterial 
whether  the  place  of  production  is  New  York  or  Boston, 
as  far  as  the  goodwill  is  concerned.     The  location  of  the 


PATENTS,  TRADE   NAMES   AND   SECRETS     379 

parent  business  unit  is  of  little  consideration.  But  with 
a  hotel  or  a  retail  store,  location  is  a  very  valued  part  of 
goodwill.  A  long-estabhshed  firm,  on  retiring  from  busi- 
ness will  have  little  difl&culty  in  finding  a  person  who, 
wishing  to  go  into  a  similar  business,  will  be  willing  to 
give  a  certain  amount,  frequently  a  large  amount,  for 
the  probabiHty  that  customers  who  have  patronized  the 
old  firm  will  continue  to  trade  with  the  new.  The  im- 
portance of  location,  as  an  element  of  goodwill,  varies  in 
every  instance  with  the  character  of  the  business. 

The  name  of  a  business  is  a  very  important  factor  in 
the  goodwill  of  many  enterprises.  A  firm  stamps  its 
name  upon  its  articles  as  a  guarantee  that  they  were 

sold  or  produced  by  the  firm.     Its  name  rather  „ 
1  .  11  1  1       Name  of 

than   its   members   becomes   known   to   the  business 

public.     Frequently  the  members  have  been  j^po^nt 
entirely  changed  and  not  a  single  member  re-  factor  in 
mains  whose   name  is   exposed  in  the  firm. 
The  business  is  nevertheless  continued  under  the  old 
name  because  customers  are  accustomed  to  it,  satisfied 
with  the  treatment  received,  and  will  continue  to  pat- 
ronize it.     A  long-estabhshed  firm  has  its  long  hst  of 
customers,  who  are  satisfied  with  their  goods  and  methods 
of  doing  business,  and  this  means  the  assurance  of  con- 
siderable  business.     The   good   name   and   estabHshed 
reputation  connected  with  the  firm's  name  are  frequently 
the  most  important  assets  of  many  business  enterprises. 
As  early  as  the  eighteenth  century,  the  goodwill  of  a 
business  was  recognized   as  of   considerable  ooodwiUis 
value.     By  the  first  quarter  of  the  nineteenth  Property- 
century,  legal  enforcement  of  contracts  for  the  sale  of 


38o  ECONOMICS  OF  BUSINESS 

goodwill  were  of  frequent  occurrence.  Goodwill  to-day, 
like  any  piece  of  property,  may  be  bought,  sold,  be- 
queathed, or  treated  in  bankruptcy  proceedings  the  same 
as  the  bankrupt's  other  property.  The  person  possess- 
ing it,  is  entitled  to  its  exclusive  use  and  will  be  protected 
in  the  same  by  the  courts. 

A  trade  mark  or  a  trade  name  cannot  exist  separate 
from  the  goodwill  of  the  business  with  which  it  is  con- 
nected.    If  a  trade  secret  is  a  part  of  an  enter- 
Close  con-  .  ^ 

nection  prise,  the  goodwill  cannot  be  sold  without  the 
bushTcM  secret.  The  connection  between  the  business 
and  good-  and  its  goodwill  is  so  close  that  the  sale  of  a 
business  or  a  share  of  it  carries  with  it,  the 
goodwill  or  a  corresponding  share  in  the  goodwill  even 
if  not  specifically  mentioned. 

A  secret  is  that  which  is  concealed  from  general  knowl- 
edge. Secrets  of  various  kinds  play  an  important  part 
Trade  i^  business.    A  secret  composition  or  secret 

secret.  process  of  manufacture,  a  recipe  for  a  medi- 

cine, confidential  information  of  various  kinds,  are  some 
of  the  trade  secrets  which  sometimes  are  valuable  assets 
in  business  enterprises.  The  owner  of  a  trade  secret  has 
absolute  control  over  it.  He  may  use  it  in  making  goods 
for  sale  or  he  may  not.  He  fixes  his  own  price  for  his 
product,  but  his  control  over  his  goods  ceases  with  his 
sale  of  them. 

The  law  does  not  protect  a  person  who  makes  an 
Protection  article  from  a  secret  in  the  same  way  that 
not  of  same    protection  is  given  to  a  patent  or  a  trade  mark. 

nature  as  .•,.■.. 

that  for  He  has  a  property  right  m  his  secret,  but  not 
trade  mark.    ^   special   property  right  as  the  owner  of  a 


PATENTS,   TRADE   NAMES   AND   SECRETS     381 

patent.  A  secret  is  valuable  only  so  long  as  it  is  a  secret. 
When  it  becomes  general  knowledge,  its  advantage  to  the 
owner  usually  ceases,  and  the  former  protection  is  with- 
drawn. 

The  owner  of  a   trade  secret  discovered   by  unfair 
means  will  be  protected  against  its  use  by  others.      If  a 
person  has  a  trade  secret  and  employs  persons 
under  contract,  expressed  or  implied,  these  per-  given  if 
sons  cannot  use  the  knowledge  obtained  of  the  i^dtscovered 
secret  against  the  employer.     Secrets  given  to  ^y  ^^^ 

,  TTIftHnS. 

confidential  employees  must  not  be  dis- 
closed, and  the  court  will  restrain  any  party  from  using 
them.  If  a  clerk  leaves  an  employer  and  goes  to  a  com- 
petitor, and  tells  a  trade  secret,  the  rival  will  be  enjoined 
from  using  it,  and  may  be  compelled  to  account  for  any 
profits  that  may  have  accrued  from  the  use  of  the  infor- 
mation. The  court  simply  protects  the  employer's 
property  right  in  the  secret.  The  disclosure  of  methods 
of  business,  processes  of  production,  recipes  for  medicines, 
and  all  sorts  of  confidential  information  is  illegal  and 
protection  will  be  given  by  the  courts. 

A  secret  legally  discovered  may  be  used  by  the  dis- 
coverer.    If  a  person  by  his  own  efforts  discovers   a 
secret,  he  has  a  right  to  use  it.     The  ingredients  of  a 
formula  of  a  medicine  sold  publicly  may  be  secret 
obtained  by  a  study  of  the  medicine  itself  legally 

discovered 

and  used.     The  secret  of  the  method  of  manu-  may  be 
facturing  may  honestly  be  obtained  by  a  "^®^* 
study  of  the  manufactured  article.     If  a  person  ac- 
quires the  secret  information  honestly,  he  may,  assum- 
ing that  there  is  no  patent,  use  it  as  he  likes.     After 


382  ECONOMICS  OF  BUSINESS 

the  death  of  an  owner  of  any  unpatented  process,  any- 
one who  honestly  discovers  it,  may  use  it  for  mercantile 
purposes,  and  even  use  the  name  of  the  original  discoverer. 
Persons  employed  for  the  purpose  of  devoting  time 
and  brains  to  discovering  new  methods  relating  to  the 

business  of  their  employer  have  no  claim 
Employer  to  their  discoveries.  The  employer  is  en- 
aulnven-**  titled  to  all  inventions  and  secrets  discovered 
tionsand  by  his  employees,  who  are  paid  to  devote 
made  by  their  time  to  that  work.  If  a  person,  while 
employees  employed  as  an  inventor,  discovers  a  valuable 
purpose.        process  and  tries  to  get  more  for  it  than  his 

salary,  the  court  will  compel  the  employee  to 

disclose  the  process,  as  legally  it  belongs  to  his  employer. 

A  trade  secret  is  property  just  as  much  as  a  piece  of 

land.    The  owner  of  a  secret  has  absolute  control  over 

it.  Trade  secrets  may  be  transferred  by  sale, 
secret  bequest  or  gift.     If  a  person  sells  for  a  valuable 

property.  consideration  a  trade  secret,  he  has  no  right 
to  reveal  it  to  a  third  party.  The  assignment  of  a  trade 
secret  carries  with  it  the  right  of  protection. 


QUESTIONS 

1.  What  are  the  requirements  for  an  application  for  a 
patent  ? 

2.  What  is  a  conceived  invention?     What  is  its  impor- 
tance? 

3.  What  is  a  specification?    Why  should  it  be  carefully 
worded  ? 

4.  What  is  an  interference?    State  its  purpose.     Give 
procedure. 


PATENTS,   TRADE   NAMES  AND   SECRETS    383 

5.  What  is  a  caveat  ?    State  its  purpose.    What  rights 
does  it  confer  ? 

6.  What  is  patent  infringement?    What  determines  an 
infringement  ? 

7.  Why  is  it  necessary  to  mark  patented  articles  ?    What 
is  the  punishment  for  fraudulent  marking  ? 

8.  What  may  a  person  do  in  case  his  application  is  rejected  ? 
What  are  the  different  appeals  ? 

9.  What  is  an  abandoned  application?    What  is  a  for- 
feited application  ? 

10.  What  are  design  patents?  Give  requisites.  What 
is  the  punishment  in  case  of  infringement  ? 

1 1 .  What  is  a  trade  name  ?    When  is  it  protected  by  court  ? 

12.  What  is  the  limitation  upon  the  use  of  a  person's 
name  in  business? 

13.  What  is  goodwill  and  give  its  characteristics? 

14.  What  is  the  importance  of  location  in  goodwill  ? 

15.  What  is  a  trade  secret  and  when  is  protection  given 
to  it? 

REFERENCES 

E.  J.  Prindle,  "Patents";  B.  Singer,  "Patent  and  Trade 
Mark  Laws  of  the  World";  E.  R.  Newell,  "Patents,  Copy- 
rights and  Trade  Marks" ;  K.  R.  Swan,  "Patent  Designs  and 
Trade  Marks";  Howson  and  Howson,  "Patents";  R.  J. 
Frank,  "Science  of  Organization  and  Business  Development," 
Ch.V. 


INDEX 


Administrative  expenses,  how  diffused, 
131. 

Advertisement,  appeal  of,  to  the  senses, 
272 ;  confusion  in,  273 ;  crowding  in, 
274;  drawing  points  for,  278. 

Advertising,  twofold  purpose  of,  261  ; 
classes  of,  261 ;  definition  of,  262 ; 
no  rigid  rules  for,  263 ;  aims  of,  263- 
264;  repetition  in,  274;  continuous, 
276;  magazine,  283-284;  news- 
paper, 284-285 ;  trade  journal,  285- 
286 ;  mail  order,  291 ;  fake  values 
in,  297;  outdoor,  299-303;  street 
car,  303-304;  novelty,  304. 

Air,  efficiency  and,  197. 

Apprenticeship,  revival  of,  188;  prin- 
ciples of  new,  189 ;  schools,  189. 

Attendance,  punctuality  in,  203 ;  irreg- 
ularity in,  204. 

Attention,  methods  of  attracting,  264- 
265. 

Auditor,  duties,  59. 

Bank  notes,  319;  legal  tender  of,  321. 

Bankruptcy,  voluntary  and  involun- 
tary, 69. 

Barter,  disadvantages  of,  307 . 

Bland- Allison  act,  314. 

Blotter,  requirements  for,  296. 

Bond,  definition  of,  61 ;  mortgage,  61 ; 
income,  61 ;  convertible,  62 ;  col- 
lateral trust,  62;  debenture,  62. 

Bondholder,  definition  of,  61 ;  rights 
of,  62. 

Bookkeeping,  cost  accounting  and, 
133- 

Booklet,  definition  of,  286;  essentials 
in  writing,  287. 

Brassage,  312. 

Business,  an  unworthy  occupation,  i ; 
definition  of,    2;    in   the  broadest 


sense,  8;  its  limited  meaning,  9; 
units,  9;  methods  of  conducting, 
20. 

Business  organizations,  types  of,  25. 

Buyers,  calculations  of,  220-228. 

Buying,  importance  of,  218;  on  fu- 
ture delivery,  230. 

By-laws,  definition  of,  45;  necessity 
of,  46 ;  requisites  for,  46. 

Calendar,  essentials  for,  295-296. 
Capital,  definition  of,   19;    kinds  of, 

goods,  19;  to  start  new  enterprise, 

107. 
Capitalization,  definition  of,  63;  basis 

of,  63. 
Carnegie,  Andrew,  76,  99,  103. 
Catalogue,  preparation  of,  294-295. 
Chairman,  of  board  of  directors,  duties 

of,  56. 
Charter,  methods  of  terminating,  35; 

definition     of,      40;      special,    40; 

general,  40;    essentials  for,  41-43. 
Climatic    conditions,     manufacturing 

and,  146. 
Coinage,  definition  of,  309;    free  and 

restricted,  310;   charges  for,  311. 
Coins,  standard,  310;  subsidiary,  310; 

gold,  312;  silver,  315;  minor,  316, 
Collective  bargaining,  214. 
Command,  direct,  278. 
Commerce,  definition  of,  11. 
Commercial  imdertakings,   classes  of, 

12. 
Conceived  invention,  362. 
Confidence,  importance  of,  106,  255. 
Contentment,  effect  on  output,   191; 

a  factor  in  efficiency,  192. 
Cooperation,  definition  of,  84;  forced, 

8s ;    means  of  obtaining,  85 ;    true 

spirit  of,  85. 


385 


386 


INDEX 


CoSperative  enterprises,  barriers  to, 
20;   kinds  of,  21. 

Coordination  definition  of,  86;  es- 
sentials for,  87  ;  importance  of,  105. 

Copartnership,  articles  of,  30. 

Copy,  definition  of,  270;  essentials  for, 
271 ;  individuality  in,  273. 

Copyright,  definition  of,  347 ;  privileges 
conferred  by,  348 ;  productions  sub- 
ject to,  348;  ad  interim,  352;  affi- 
davit for,  353  ;   assignment  of,  355. 

Copjrwriter,  requisites  for,  277. 

Corporation,  definition  of,  31 ;  sole, 
31;  public,  31;  private,  32;  non- 
stock, 32 ;  stock,  32 ;  advantages  of, 
34 ;  control  of,  38 ;  disadvantages  of, 
38;  domestic,  43;  alien,  43;  foreign 
44;  powers  of,  44;  special  powers 
of,  45- 

Cost  accounting,  definition  of,  1 23 ; 
successful  system  of,  132 ;  impor- 
tance of,  134;  check  on  wastes,  134; 
assists  in  price  making,  135 ;  pre- 
vents ruinous  competition,  136; 
care  in  installation  of,  system,  137. 

Cost  period,  130. 

Cost  records,  essentials  of,  123. 

Costs,  material,  definition  of,  121. 

Costs  of  production,  division  of,  i2i. 

Counsel,  duties  and  pwwers,  59. 

Coupon,  definition  of,  279. 

Credit,  definition  of,  322;  fundamen- 
tals of,  323-326;  information,  326- 
331- 

Credit  exchanges,  329. 

Credit  system,  development  of,  13. 

Cumulative  voting,  54. 

Customers,  methods  to  attract,  243; 
holding,  24s ;  viewpoint  of,  246 ; 
study  of,  247 ;  information  about, 
256. 

Decorations,  how  used,  268. 

Demand,  definition  of,  15. 

Depredation,  definition  of,  178;  of 
buildings,  181 ;  determination  of, 
182;  Cole's  method  for,  184;  for 
small  tools,  185. 

Design  patents,  375. 

Details,  old  method  of  dealing  with. 


108;    elimination  of,  108;    evils  of, 

109. 
Directors,  agents  of  a  corporation,  52 ; 

liability  of,  52 ;  qualifications  of,  53 ; 

must  act  as  body,  53 ;  dummy,  54. 
Discipline,  iii. 
Dispatching  system,  definition  of,  159; 

emergency,  160. 
Display,  demands  of  a  good,  270. 
Dissipation,  effects  of,  77. 
Dividends,  definition  of,  59 ;   power  to 

declare,  59 ;  granting  of,  60. 
Division    of    labor    definition   of,   7; 

effects  of,  7;  based  on  cooperation, 

84. 
Domestic  system,  4. 
Dress,  importance  of,  250-251. 
Driving,  effects  of,  191. 
Dust,  and  low  efficiency,  198. 

Economic  activities,  definition  of,  2. 

Efficiency,  definition  of,  87;  standard 
for,  87;  determination  of,  88;  in 
labor  force,  89;  in  factory,  89; 
measure  of,  92 ;  in  moving  goods, 
160;  in  retail  and  wholesale  enter- 
prises, 163  ;  contentment  and,  192  ; 
healthy  workmen  and,  195 ;  tem- 
perature and,  197;  dust  and,  198; 
light  and,  198-199 ;  saving  of  energy 
and,  200 ;  demands  of,  201 ;  fatigue 
and,  211;  soldiering  and,  212,  213; 
trade  unions  and,  213-214. 

Electric  sign,  use  of,  301-302. 

Energy,  saving  of,  200. 

Enthusiasm,  255. 

Entrepreneur,  a  separate  factor,  19; 
duties  of,  97-102 ;  quaUties  of,  102- 
107;  director  of  broader  policies, 
108;  aims  of,  in;  demands  on, 
to  reach  efficiency,  112;  place  of, 
in  business,  118. 

Entrepreneurship,  single,  definition  of, 
25 ;  adapted  to  few  enterprises,  26. 

Experimenting  with  men,  192-193. 

Extractive  industries,  10. 

Factors  of  production,  17. 
Factory,    efficient,    90;     towns,    145; 
buildings,  149;  equipment,  150. 


INDEX 


387 


Factory  system,  definition  of,  5  ;  effects 
of,  5 ;  introduced  new  problems,  6. 

Familiarity,  effects  of,  106. 

Family  system,  3. 

Fatigue,  definition  of,  211;  efficiency 
and,  211. 

Follow-up  system,  use  of,  292. 

Forecasting,  the  future,  100,  103; 
supply  and  demand,  224,  247. 

Foreclosure,  73. 

Free  samples,  how  to  use,  298. 

General  manager,  duties   and  powers 

of,  s8. 
Gold  certificates,  318. 
Gold  coins,  312. 

Good  judgment,  in  business,  104. 
Goods,  to  carry  in  stock,  233. 
Goodwill,     satisfied    customers,     245 ; 

definition  of,  378;    property,  379. 
Greenbacks,  3i6;''"I:edemption  of,  317. 
Gross  income,  122. 
Guilds,  4. 

Hamilton,  Alexander,  80. 

Hand  bills,  use  of,  297-298. 

Handicraft  system,  3 ;   weakness  of,  4. 

Harmony,  104. 

Headlines,    definition    of,    267 ;    how 

used,  267-268. 
Holding  company,  definition  of,    67 ; 

purpose  of,  67. 
House  organ,  definition  of,  288 ;  classes 

of)  289;  how  to  write,  289-290. 
Human  element,  importance  of,  79-80. 

Illustration,  essentials  for  a  good,  265 ; 
various  forms  of,  266. 

Incorporators,  definition  of,  40;  quali- 
fications of,  43. 

Indexing  and  fiUng  systems,  importance 
of,  124. 

Industrial  leader,  characteristics  of,  91. 

Inefficiency,  causes  of,  191 ;  tardiness 
and,  202. 

Insolvency,  causes  for,  68. 

Interference,  trade  mark,  340 ;  patent, 
367. 

Inventory,  permanent,  158;  defini- 
tion of,  171;   old   method  of,  172; 


preparations  for,  172;  in  progress, 
173-174;   importance  of,  175. 

Investment,  early  forms  of,  37. 

Irregularity  in  attendance,  causes  of, 
204 ;  treatment  of,  204. 

Jobber,  definition  of,  237. 
Joint  inventors,  374. 
Joint  stock  company,  definition  of,  28; 
characteristics  of,  29, 

Knowledge,  of  goods,  220,  253,  277; 
of  costs,  221;  of  markets,  222-223; 
of  firm's  finances,  224;  of  how  goods 
are  shipped,  226;  of  inventions  and 
improvements,  227  ;  of  market  con- 
ditions, 247 ;  of  trade  conditions, 
257 ;  of  buyers,  277. 

Labor,  definition  of,  18;  physical  and 
mental,  18;  direct  and  indirect,  121 ; 
productive  and  non-productive,  121 ; 
cost  of  direct,  125  ;  supply  of,  144. 

Laboratories,  to  determine  quality,  161. 

Labor  efficiency,  demands  of,  215. 

Land,  definition  of,  17;  its  aid  in 
production,  17-18. 

Legal  tender,  definition  of,  320;  of  the 
present  currency,  320-321. 

Letter,  requirements  of,  293. 

Liability,  single  entrepreneurship  and, 
26 ;  partnership  and,  27  ;  limited,  35  ; 
subscription,  35  ;   double,  35. 

Light  and  efficiency,  198. 

Location,  chief  factors  affecting,  141 ; 
markets  and,  141-142 ;  transporta- 
tion and,  142 ;  power  agents  and, 
143;  labor  supply  and,  144-145; 
climatic  conditions  and,  146;  water 
supply  and,  147  ;  capital  and,  147  ; 
suburb,  148 ;  of  store,  148. 

Luck,  factor  in  business,  117,  133. 

Machinery,  care  of,  150. 

Magazine,  for  advertising  purposes, 
283-284. 

Mail  order,  advantages  of,  240;  dis- 
advantages of,  241 ;  advertising,  262, 
291. 

Maintenance,  definition  of,  179. 


388 


INDEX 


Managerial  ability,  6. 

Manufacturer,  early,  4;  old  and  new 
meaning  of,  11. 

Manufacturing,  definition  of,  10;  in- 
cludes commercial  activity,  1 1  ; 
chief  aim  in,  155. 

Market,  importance  of,  8 ;  early  mean- 
ing of,  14;  extension  of,  15;  modem 
meaning  of,  15;  kinds  of,  16;  limi- 
tations to,  16;  nearness  to  consum- 
ing, 141. 

Materials,  direct,  125,  156;  classifica- 
tion of,  iss;  storage  of,  156;  move- 
ment of,  160;  buying  of,  161;  eco- 
nomical use  of,  162. 

Mediums,  definition  of,  282 ;  varieties, 
282;   choice  of,  282. 

Mercantile  agencies,  328. 

Merchant,  during  the  handicraft  period, 
34. 

Money,  definition  of,  307;  materials 
used  as,  307 ;  functions  of,  308. 

Natural  forces,  assistance  to  man,  18. 

Newspaper,  use  in  advertising,  284- 
28s. 

Non-staples,  definition  of,  228;  buy- 
ing, 228;  overbuying,  231. 

Nourishment,  proper,  199. 

Novelties,  advertising,  304. 

Nurses,  importance  of,  196. 

Obsolescence,  definition  of,  180 ;  reasons 
for,  180-181. 

Orders,  how  given,  no. 

Organization,  definition  of,  75;  busi- 
ness, 76 ;  object  of,  76 ;  aims  of,  77 ; 
elements  necessary  for  success  in,  79. 

Outdoor  advertising,  298-303. 

Overbuying,  limitations  on,  229;  when 
justifiable,  230;  non-staples,  231. 

Overcapitalization,  definition  of,  64. 

Overhead  expenses,  definition  of,  121; 
division  of,  122;  methods  of  diffu- 
sion 126;  percentage-to-direct  labor 
method,  126;  hourly  rate  method, 
127;  sales  method,  128;  machine 
hovir  method,  128;  distributed 
directly,  129. 

Overstocking,  219. 


Painted  signs,  purpose  of,  300;  kinds 
of,  300;  requirements  of,  301. 

Partners,  liabiUty  of,  27 ;  special, 
27. 

Partnership,  definition  of,  26;  forma- 
tion of,  27 ;  liability  in,  27 ;  disso- 
lution of,  28;  general,  28;  special, 
28 ;  advantages  of,  29. 

Patent,  congress  power  over,  361 ;  def- 
inition of,  361 ;  requirements  for  a, 
363 ;  persons  who  may  acquire,  363 ; 
application  for,  364;  time  of,  369; 
foreign,  369;  infringement  of,  369; 
search  for,  370;  is  property,  372; 
appeal  in,  cases,  373 ;  abandonment 
of,  374;  design,  375. 

Permanency,  in  service,  193. 

Personality,  source  of,  91 ;  importance 
of,  91 ;  in  large  corporations,  92. 

Pictures,  use  in  advertising,  265; 
objections  to  use  of,  267. 

Piece  rate,  definition  of,  206 ;  requi- 
sites for,  206 ;  causes  of  antagonism 
to,  207 ;  old  system  of,  207 ;  proper 
method  for  fixing,  208;  scientific, 
209. 

Posters,  definition  of,  299;  use  in 
advertising,  299-300. 

Preferred  positions,  268-269. 

President,  duties  of,  56 ;  powers  of,  57. 

Producers,  classes  of,  5. 

Production,  center  of  business  activity, 
2  ;  systems  of,  3 ;  units  of,  s ;  limit 
to,  8. 

Profits,  definition  of,  113;  division  of, 
114;  minimum,  115;  vary  in 
amount,  116;  compensation  for 
risk  taking,  116. 

Profit  sharing,  definition  of,  209; 
objections  to,  210. 

Promises,  how  kept,  226. 

Promoter,  definition  of,  65;  work  of, 
65 ;  pay  of,  67. 

Promotion,  methods  of,  65. 

Promptness,  in  filling  orders,  225. 

Public  ownership,  20. 

Punctual  attendance,  203. 

Quality,  in  goods  purchased,  x6i ; 
in  goods  produced,  161. 


INDEX 


389 


Receiver,  definition  of,  69 ;  powers  of, 
70 ;  duties  of,  70. 

Receivership,  purposes  of,  69. 

Redemption  act,  1875,  317. 

Red  tape,  definition  of,  82. 

Reorganization,  definition  of,  71 ; 
method  of,  71 ;  requires  imanimous 
consent,  73. 

Repair  man,  duties  of,  150. 

Reports,  importance  of,  108;  sales- 
men's, 257. 

Retail  merchants,  methods  of  reaching, 
239. 

Retail  stores,  location  of,  148;  ad- 
vantages and  disadvantages  of,  242. 

Risks,  assumed  by  entrepreneur,  99 ; 
of  markets,  100 ;  shifted  to  specialists, 
loi ;  in  a  corporation,  107 ;  com- 
pensation for,  116. 

Sale,  how  to  close  a,  252. 

Sales  manager,  qualifications  for,  248. 

Salesmanship,   fundamental  principles 

of,  249-250. 
Salesmen,  selecting,  248;    training  of, 

249;  classes  of,  256 ;  reports,  257. 
Satisfaction,  importance  of,  245. 
Secretary,  duties  of,  57. 
Securities,  markets  for,  16. 
Seigniorage,  312. 
Selling,  importance  of,  236;    methods 

of,  237  ;  direct  to  consumers,  240. 
Selling  expenses,  how  diffused,  131. 
SelUng  price,  factor  in  profits,  122, 
Seniority,  when  recognized,  194. 
Service,  its  demands,  244. 
Sherman  act,  314. 
Shipping    department,     166;     system 

necessary  in,  167. 
Silver  certificates,  318. 
Silver    dollar,    redemption    of,    311; 

origin  of,  313  ;  amount  coined,  315. 
Single  entrepreneurship,  definition  of, 

25  ;  Umitations  to,  25 ;  liability  of,  26. 
Smith,  Adam,  8. 
Soldiering,  definition  of,  212;  methods 

of,  212;  elimination  of,  213. 
Specialization,  187. 
Specification,  definition  of,  364;  every 

essential  must  be  disclosed  in,  365. 


Standard,  quality,  176;  tools  and 
machines,  177;  methods,  177;  sell- 
ing talks,  253-254. 

Standardization,  definition  of,  175; 
necessary  in  factory,  177. 

Staples,  definition  of,  228. 

Stock,  capital,  46 ;  certificate,  47 ; 
methods  of  issuing,  47  ;  dividend,  47 ; 
common,  48;  preferred,  48;  pre- 
ferred, cumulative,  48;  preferred, 
non-cumulative,  48. 

Stockholder,  definition  of,  47;  powers 
of,  55  ;  the  risk  taker,  107. 

Store,  location  of,  148. 

Storeroom,  location  of,  157;  a  neces- 
sity, 157. 

Stores,  definition  of,  155. 

Stream  of  modem  industry,  12. 

Street  car,  use  in  advertising,  303-304. 

Strenuousness,  definition  of,  90. 

Style,  importance  of,  in  buying,  227- 
228;  a  factor  in  selling,  244. 

Success,  essentials  for,  106. 

Suggestion,  importance  of,  254. 

Supplies,  definition  of,  156. 

Supply,  definition  of,  15. 

System,  definition  of,  80;  a  workable 
system,  81 ;  installation  of,  81 ; 
lack  of,  83 ;  advantages  of,  84. 

Tact,  definition  of,  255. 

Tardiness,  deaUng  with,  202. 

Technical  knowledge,  importance  of, 
105. 

Time  wages,  205. 

Tool  room,  a  necessity,  153 ;  functions 
of,  153- 

Tools,  old  method  of  providing,  151 ; 
necessity  of  modem,  153;  repairing 
of,  154;  making  of,  155. 

Trade  dollar,  313. 

Trade  journal,  285. 

Trade  mark,  definition  of,  33s ;  appli- 
cation for,  338 ;  registration  of,  339 ; 
cancellation  of,  340;  attached  to 
goods,  342 ;  infringement  of,  346. 

Trade  name,  definition  of,  375 ;  when 
protected,  376;  vaUd,  377. 

Trade  secret,  definition  of,  380 ;  when 
protected,  381. 


390 


INDEX 


Trade  unions  activity  of,  145 ;  effi- 
ciency and,  213-214. 

Transmission  of  intelligence,  14. 

Transportation,  definition  of,  13; 
methods  of,  14;  good  facilities  of, 
142. 

Treasurer,  duties  and  powers  of,  58. 

Treasury  notes,  318. 

Understocking,  219. 

Underwriter,  66. 

United  States  Steel  Corporation,  37, 

38,  42. 
Utilities,  definition  of,  18. 


Ventilation,  elements  of,  197. 
Vice-President,     duties     and     powers 
of  57- 

Wages,  problem  of,   204;    time,  205; 

based  on  productivity,  211. 
Wages  of  management,  definition  of, 

114;  vary  in  amount,  115. 
Waste,  definition  of,  168;    in  buying 

materials,  169;   in  use  of  materials, 

169;   of  time,  170;   of  energy,  170; 

detection  of,  171. 
Watered  stock,  64. 
Wholesale  stores,  location  of,  149. 


T 


HE   following  pages    contain   advertisements  of  a 
few  of  the   Macmillan  books  on  kindred  subjects. 


Business 
Organization  and  Combination 

An  Analysis  of  the  Evolution  and  Nature  of  Business  Or- 
ganization in  the  United  States  and  a  Tentative  So- 
lution of  the  Corporation  and  Trust  Problems 

By  lewis    H.    HANEY,    Ph.D. 

Professor  of  Economics  in  the  University  of  Texas.     Author 

of  "  A  Congressional  History  of  Railways  "  and 

"  History  of  Economic  Thought." 

Dr.  Haney  in  his  treatment  of  business  organization  recog- 
nizes two  kinds :  business  that  is  productive  from  the  social 
point  of  view,  and  business  that  is  productive  only  from  the 
individual  point  of  view.  According  to  the  social  point  of 
view,  business  is  productive  when  it  adds  to  the  net  sum  of 
goods  and  services  which  men  want ;  that  is,  when  the 
amount  of  food,  clothes,  books,  automobiles,  teaching,  medi- 
cal service,  etc.,  is  increased.  But  individuals  may  grow 
rich  in  ways  which  do  not  increase  the  net  sum  of  goods  and 
services  and  still  be  actively  engaged  in  business,  or  in  pro- 
duction from  the  individual  standpoint.  A  large  part  of  ad- 
vertising is  merely  acquisitive,  not  adding  anything,  but  tak- 
ing for  one  business  man  what  another  business  man  loses. 
So  it  is  with  some  "  speculation  "  and  some  middlemen's  ac- 
tivities. But  all  this,  when  recognized  as  lawful  and  when 
the  price  is  freely  paid,  Dr.  Haney  calls  "business  ";  and  in 
the  long  run,  he  holds,  the  test  of  a  good  business  man  is 
simply  the  amount  of  income  or  private  gain  which  he  ac- 
quires legally.  In  his  treatment  Dr.  Haney  has  recognized 
"  business  "  to  include  some  activities  which  add  nothing  to 
the  sum  total  of  society's  wealth. 


THE   MACMILLAN   COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


Increasing  Human  Efficiency 
in  Business 

By  WALTER    DILL   SCOTT 

Illustrated^  cloth^  r2mo,  $/.2j  net;  postpaid^  $1.36 

The  author  of  this  work,  who  is  Professor  of  Psychology  in  North- 
western University,  has  been  for  a  number  of  years  engaged  in 
the  application  of  the  principles  derived  from  psychology  to 
business,  and  the  results  of  his  investigations  are  incorporated  in 
the  present  volume. 

The  author  first  considers  the  possibility  of  increasing  human 
efl5ciency  and  shows  that  while  old  methods,  old  tools,  old  instru- 
ments, have  been  discarded  for  new  and  far  more  effective  sub- 
stitutes, man  is  the  only  factor  which  has  withstood  the  change. 
The  contention  is  that  human  efficiency  is  a  variable  quantity 
which  increases  and  decreases  according  to  law.  By  the  applica- 
tion of  known  physical  laws  the  telephone  and  telegraph  have 
supplanted  the  messenger  boy.  By  the  laws  of  psychology  applied 
to  business,  equally  astounding  improvements  are  being  and  will 
be  secured. 


"In  this  book  one  of  the  country's  best-known  practical 
psychologists  shows  how  this  science  will  help  you  ...  in 
making  sales,  closing  deals,  writing  advertisements,  hiring  and 
handling  employees.  It  shows  how  men  Think  and  Act;  how 
they  are  influenced  by  both  Argument  and  Suggestion.  Your 
success  depends  largely  upon  your  ability  to  influence  men.  This 
book  shows  a  practicaJ  way  to  increase  that  ability."  — Banker  and 
Investor  Magazine. 

"  We  commend  Professor  Scott's  book  to  all  who  may  be  inter- 
ested in  the  subject ;  for  while  there  is  much  more  to  be  said 
than  he  says,  yet  what  he  does  say  is  calculated  to  make  the 
reader  think  and  act  for  himself;  and  no  book  can  do  better 
than  that."  —  Dun's  Review. 

"An  important  contribution  to  the  literature  of  business 
psychology."  —  The  American  Banker. 


THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


Elementary  Principles  of  Economics 

By  IRVING   FISHER 

Professor  of  Political  Economy,  Yale  University 
Clothy  i2mo,  jj/  pages,  $2.00  net 


EXTRACTS  FROM  THE  PREFACE 

Of  the  many  possible  methods  of  writing  economic  textbooks,  there  are 
three  which  follow  well-defined,  though  widely  different,  orders  of  topics. 
These  are  the  "historical,"  the  "logical,"  and  the  "pedagogical."  .  .  . 

The  pedagogical  begins  with  the  student's  existing  experience,  theo- 
ries, and  prejudices  as  to  economic  topics,  and  proceeds  to  mold  them 
into  a  correct  and  self-consistent  whole.  The  order  of  the  first  method, 
therefore,  is  from  ancient  to  modern;  that  of  the  second,  from  simple  to 
complex;  and  that  of  the  third,  from  familiar  to  unfamiliar.  The  third 
order  is  the  one  here  adopted.  That  the  proper  method  of  studying 
geography  is  to  begin  with  the  locality  where  the  pupil  lives  is  now  well 
recognized.  Without  such  a  beginning  the  effect  on  the  student's  mind 
may  be  like  that  betrayed  by  the  schoolgirl,  who,  after  a  year's  study 
in  geography,  was  surprised  to  learn  that  her  own  playground  was  a  part 
of  the  surface  of  the  earth.  .  .  . 

This  book,  therefore,  aims  to  take  due  account  of  those  ideas  with 
which  the  student's  mind  is  already  furnished,  and  to  build  on  and  trans- 
form these  ideas  in  a  manner  adapted  to  the  mind  containing  them. 
This  is  especially  needful  where  the  ideas  are  apt  to  be  fallacious.  The 
economic  ideas  most  familiar  to  those  first  approaching  the  study  of 
economics  concern  money, — personal  pocket  money  and  bank  accounts, 
household  expenses  and  income,  the  fortunes  of  the  rich.  Moreover, 
these  ideas  are  largely  fallacious.  Therefore,  the  subject  of  money  is 
introduced  early  in  the  book  and  recurred  to  continually  as  each  new 
branch  of  the  study  is  unfolded.  For  the  same  reason  considerable  at- 
tention is  given  to  cash  accovmting,  and  to  those  fundamental,  but  neg- 
lected principles  of  economics  which  underlie  accounting  in  general. 
Every  student  at  first  is  a  natural  "  mercantilist,"  and  every  teacher 
has  to  cope  eventually  with  the  prejudices  and  misconceptions  which 
result  from  this  fact.  Yet  no  textbook  has  apparently  attempted  to 
meet  these  difl&culties  at  the  point  where  they  are  first  encountered, 
which  is  at  the  beginning.  .  .  . 


THE   MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


Principles  of  Economics 

By  F.  W.  TAUSSIG 

Henry  Lee  Professor  of  Economics  in  Hai-vard  University 

Two  volumes.     Cloth,  Svo,  $^.oo  mt 

The  book  deals  chiefly  with  the  industrial  conditions  of  modern 
countries,  and  most  of  all  with  those  of  the  United  States.  Eco- 
nomic history  and  economic  development  are  not  considered  in  any 
set  chapters,  being  touched  only  as  they  happen  to  illustrate  one  or 
another  of  the  problems  of  contemporary  society. 

Among  the  important  chapters  are  those  on  Wealth  and  Labor ; 
The  Division  of  Labor  and  the  Development  of  Modern  Industry ; 
Quantity  of  Money  and  Prices  ;  Differences  of  Wages  ;  Wages  and 
Value ;  General  Wages  ;  Trade-Unions  and  Labor  Legislation. 

Of  these  perhaps  the  most  important  is  that  dealing  with  General 
Wages.  Here  the  fundamental  questions  as  to  general  wages  as 
raised  by  the  case  of  hired  laborers  is  discussed ;  also  the  notion 
that  lavish  expenditure  creates  demand  for  labor  and  makes  wages 
high. 

The  author  explains  why  hired  laborers  universally  desire  that 
employment  should  be  created  and  dislike  labor-saving  appliances. 

The  author  states  the  principles  of  economics  in  such  form  that 
they  are  comprehensible  to  an  educated  and  intelligent  person  who 
has  not  before  made  any  systematic  study  of  the  subject. 


"The  book  is  a  notable  addition  to  the  literature  of  political 
economy.  The  ease  born  of  thorough  familiarity  with  every  part 
of  the  subject,  and  of  long  practice  in  successful  teaching  of  mature 
students,  is  apparent  in  style  throughout."  —  New  York  Evening 
Post. 


THE  MACMILLAN  COMPANY 

Publishers  64-66  Fifth  Avenue  New  York 


The  Purchasing  Power  of 
Money 

A  STUDY  OF  THE  CAUSES  DETERMINING  THE 
GENERAL  LEVEL  OF  PRICES 


AN    EXPLANATION   OF   THE   RISE    IN    THE   COST    OF    LIVING 
BETWEEN    1896   AND    1910 

By    IRVING    FISHER 

Yale  University 

Author  of  "  The  Rate  of  Interest,"  "  The  Nature  of  Capital  and  Income," 
"  A  Brief  Introduction  to  the  Infinitesimal  Calculus,"  etc. 

Cloth  J  8vo,  505  pages  J  $3.00  net;  by  mail,  $3.18 

"The  work  is  well  and  authoritatively  written  and  forms  a  splendid  addi- 
tion to  economic  literature."  —  Bulletin  of  the  Chamber  of  Commerce. 

"  A  searching  and  thorough  restatement  and  amplification  of  the  old  *  quan- 
tity theory '  of  money  and  a  plea  for  the  recognition  as  an  exact  science  of  the 
branch  of  economics  which  treats  of  the  factors  in  its  purchasing  power."  — 
Chicago  Evening  Post. 

*'  By  far  the  most  important  work  yet  published  on  that  special  phase  of 
economics  with  which  it  is  concerned."  —  Saturday  Chronicle. 

**No  more  important  work  on  money  has  recently  appeared."  —  Newark 
Evening  News. 

"  A  volume  which  has  practical  as  well  as  academic  value."  —  Boston  Globe, 


PUBLISHED    BY 

THE   MACMILLAN  COMPANY 

64-66  Fifth  Avenue,  New  Tork 


14  DAY  USE 

RETURN  TO  DESK  FROM  WHICH  BORROWED 

LOAN  DEPT. 

This  book  is  due  on  the  last  date  stamped  below,  or 

on  the  date  to  which  renewed. 

Renewed  books  are  subject  to  immediate  recall. 


8Wa» 


'ggPTjy 


REC'D  LD 


FEB22l9fi? 


NOV  2  8 1982 


LD  21A-507n-8,'61 


General  Library 


YB  05904 


